Technical Trading 101: The Indicator that Fires First

It’s garbage. 

It’s nothing more than pseudo-science with zero validity.

"I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer,” said Warren Buffett.

"Charts are great for predicting the past,” said Peter Lynch.

Others argue that technical analysis isn’t worthwhile because its techniques don’t work 100% of the time.  Then again, fundamental analysis isn’t perfect either.  If it were, every fundamental investor would be worth as much as Buffett.

But there’s no such thing as 100% accuracy. 

Truth is -- The value of any school of thought is determined by whether it helps you consistently make more money than you lose.  It’s why we try to drown out the idea that my school of thought is better than your school of thought.

When it comes to fundamental analysis, we’re evaluating a stock in an effort to find its intrinsic value through economic, financial and quantitative methods.  Unfortunately, it doesn’t do a great job of uncovering herd-like overreactions that technical analysis unveils.

And as I’ve learned over 20 years of trading, one of the most important factors for success is an understanding of the very fear and greed that’s driving the stock.  In fact, one of my favorite indicators over the years has been Williams’ %R (W%R) because of its “crystal ball” ability.

Created by Larry Williams, W%R is an oscillator that moves between 0 and -100, providing insight into just how weak or strong a stock, future, currency, index, or even ETF is. With it, we can tell with good accuracy how oversold or overbought a trade has become.

But what sets it apart from other technical indicators is that it’s the “first to fire.”

It’s one of the first indicators – among RSI, DMI, Bollinger Bands, and Money Flow – to signal a potential reversal before even the stock begins to reverse.  In fact, it’ll hit a peak or trough and then reverse before the stock price follows a similar pattern.

A quick look at Palo Alto Networks (PANW) price moves on a chart offers an example of W%R at work at overbought and oversold points.

As Futures Magazine points out, “Often, Williams %R identifies a reversal in the stock market, and at times it can be very precise.  The indicator almost always forms a peak and turns down a few days before the security’s price peaks and turns down.”

Or look at Amazon.com (AMZN).

Before the stock moved up or down, W%R already predicted the move, firing first.

“The indicator almost always forms a peak and turns down a few days before the security’s price peaks and turns down.”

Such behavior shows that technicians should always confirm with Williams %R action.  However, it’s not a perfect indicator.  It’s why it’s always best to confirm with others, such as relative strength, MACD, Money Flow and even Bollinger Bands.