Larry Williams %R is based on a similar concept of measuring the latest close in relation to its price range over a given number of days. Today's close is subtracted from the price high of the range for a given number of days and that difference is divided by the total range for the same period. The concepts already discussed for oscillator interpretation are applied to %R as well, with the main factors being the presence of divergences in overbought or over­sold areas. (See Figure 10.18.) Since %R is subtracted from the high, it looks like an upside down stochastics. To correct that, charting packages plot an inverted version of %R.Choice of Time Period Tied to Cycles
Oscillator lengths can be tied to underlying market cycles. A time period of 1/2 the cycle length is used. Popular time inputs are 5, 10, and 20 days based on calendar day periods of 14, 28, and 56 days. Wilder's RSI uses 14 days, which is half of 28. In the previous chapter, we discussed some reasons why the numbers 5, 10, and 20 keep cropping up in moving average and oscillator formula­tions, so we won't repeat them here. Suffice it to mention here that 28 calendar days (20 trading days) represent an important dominant monthly trading cycle and that the other numbers are related harmonically to that monthly cycle. The popularity of the 10 day momentum and the 14 day RSI lengths are based largely on the 28 day trading cycle and measure 1/2 of the value of that dominant trading cycle. We'll come back to the importance of cycles in Chapter 14.