Williams %R: what is it and how to use it

Williams %R (Williams Percent Range), or Percent R as it is also known, is a technical indicator that can help traders to identify when an asset is oversold or overbought.

Having ascertained that the asset has moved too much in one direction or another, we can then position ourselves to benefit from a likely price reversion.

Momentum indicator

Williams %R is thought of as a momentum indicator, having been conceived by American trader and technical analyst Larry Williams.

%R was first introduced in Williams’ 1979 book How I Made $1,000,000 Trading Commodities Last Year.

The Larry Williams trading strategy works by comparing the closing prices of an asset to its high-low price range over a given time period.

In this way, traders can potentially better identify optimum buy and sell points.

%R, sometimes called the wpr indicator, tends to be thought of as the inverse of the Fast Stochastic Oscillator.

While the Fast Stochastic considers the closing price in relation to the lowest low over the period, %R evaluates the close price in direct comparison to the highest high.

Larry Williams

%R formula

%R is calculated as: (Highest High – Closing Price) / (Highest High – Lowest Low) x -100

The highest price represents the highest registered price during the particular time period.

Likewise, the lowest price is the lowest recorded during the time period.

As the closing price is at the end of the particular period, many traders recommend waiting until the current candlestick bar has ended before acting on the %R signal.

In an especially volatile market, a candlestick chart can quickly oscillate from one direction to another.

The Williams %R equation will give a result in the range of 0 to -100.

Your strategy

In practice, you should never need to calculate %R as it is a typical indicator found in the charting tools of trading platforms.

While Larry Williams originally used the formula with a 10-day trading period, you should be able to vary the time period to fit your particular trading strategy.

It’s worth bearing in mind that many charting packages tend to offer %R with a default period of 14 days.

Interpreting %R

The Williams %R equation will give a result in the range of 0 to -100.

Should we get a reading of 0 to -20, then the %R is telling us the asset is overbought.

On the other hand, should %R fall in the range of -80 to -100 then the asset is oversold.

As with technical indicators, %R is best used in conjunction with other analytical tools rather than in isolation.

For example, %R can be combined with other indicators such as trading volumes and chart patterns.

As a general rule, any technical signal that is accompanied by higher trading volumes is likely to be viewed as more reliable than one observed amid relatively weak volumes.

%R applied to IBM shares. Source: StockCharts

Evidence

Just because an asset may appear overbought or oversold based on the %R, this doesn’t necessarily mean that the price trend is about to reverse.

However, if other technical or fundamental analysis leads us to conclude there is a good chance of a price reversal, then Williams %R can help us choose a good point to take advantage of a potential swing in either direction.

At the same time, many traders prefer to wait until there is more evidence of an actual trend reversal before acting on %R.

Reversals

For instance, having used %R to identify an oversold or overbought asset price, we could then wait for the %R parameter to cross another threshold to confirm that the price trend has actually begun to reverse.

So, if we get a reading of -90 and the asset is therefore appearing oversold, we may choose to wait until %R subsequently passes through -50, the mid-point on the scale, before initiating a buy trade to take advantage of the price trend reversal.

Taking the opposite case, suppose we’d received a %R reading of -10 indicating the asset was overbought.

Rather than acting straightaway, we could wait for the %R to cross back above -50 as confirmation that there has been a price trend reversal before we implement a sell trade.

%R is commonly combined with other technical indicators to identify trading opportunities.

Changing momentum

%R can also be used to help identify more subtle changes in momentum, rather than outright changes in direction.

For instance, suppose an asset has previously breached -80 on more than once occasion. In more recent time frames, however, the %R reading has remained firmly below this level.

This would suggest that overall selling momentum has weakened.

Identifying overbought and oversold price levels. Source: StockCharts

Trading opportunities

%R is commonly combined with other technical indicators to identify trading opportunities.

Suppose we focus on stocks that are trading above their 200-day moving average, and hence are in a long-term rising price trend.

Asset prices never rise in a straight line for very long, so pullbacks are common even as part of a longer-term uptrend.

We can identify a pullback in a stock that is experiencing a longer-term bullish trend when the %R moves below -80.

However, we could hit the buy button, choosing to initiate a trade in the same direction as the longer-term trend, when %R moves past -50 again.

Conversely, suppose we search for stocks that are trading below their 200-day moving average, and hence are in a longer-term down trend.

A %R reading of -20 in such a stock would indicate it has become overbought, possibly in a temporary blip from the overall downtrend.

This would be confirmed when we get a reading above -50 again, signalling that the downtrend has resumed, potentially pointing to a good opportunity to go short on the stock.

Candlestick chart

Powerful indicator

%R can be a powerful technical indicator, helping us to identify opportunities to go long or short in assets.

As with other technical indicators, it’s important not to use %R in isolation.

Along with fundamental information such as news flow, %R signals can be used in combination with a variety of other technical indicators to help us make better trading decisions.

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