Williams %R

Introduction

In the world of stock trading you should make no compromises when it comes to ensuring the reliability of your decisions or analysis as one wrong move and there’s no telling how much you could lose.

This is why any effort made to better improve the accuracy of your analysis or decision making will always be a welcome thing but the question still remains how can you do that?

The answer to that is simple and that is indicators like the RSI, the MACD or the EMA and each of these no doubt has their own function or is meant to discern some aspect of the landscape whether it be overbought or oversold conditions, whether the asset is trending downward or upward or whether a reversal is about to occur.

But the indicator that we’ll be discussing here today is the Williams %R which you may want to look into if you wish to know how the market has been doing lately or what the conditions imply.

What is Williams %R?

The Williams %R or the Williams Percent Range as its full form is was developed way back in the early 1970s with Larry Williams being its  founder which is where that name comes from.

It’s often compared to the Stochastic Oscillator and its even used in a similar way but as to what its purpose really is lets find that out below.

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The Purpose of Williams %R

The Williams %R oscillator is basically a momentum indicator thats used to identify possible reversals within the market and oversold or overbought conditions.

To elaborate the Williams Percent Range simply measures what the relationship is between the current highs and lows across a certain period which is usually 14 periods or days and the current closing price.

Its this relationship thats then represented as a percentage typically from 0 to -100.

Despite how simple it may seem the indicator offers some valuable insights that may complement other analytical tools and possibly even enhance your trading strategies.

How is Williams %R Calculated?

No matter what trading platform you plan on using or are using if it supports the Williams %R indicator then you wont need to calculate those values for yourself as it’ll do all of it for you.

But if you happen to be genuinely curious how the calculations are done with this indicator then read on as that’ll be looked more into below.

Williams %R Calculation Steps

Well if you’re going to know about those calculations then you have to know the formula first and here it is: Williams %R = Highest High – Close/Highest High – Lowest Low.

Here the highest high is basically the highest price within the entirety of the lookback period which is typically 14 days, the close would be the most recent closing price and the lowest low would naturally be the lowest price within that lookback period. 

So now that you’re aware of all those variables in the formula let’s see how you can go about calculating those values then but a quick reminder, you can always adjust the lookback period to your liking but here we’ll use the default. 

So start by recording the high and the low for every period across 14 periods and for the 14th period take note of the existing highest, lowest and current prices which will then give you every variable you’ll need for the Williams %R.

On the fifteenth period once again note those highest, lowest and current prices but know that you’ll still use only the data from the last 14 periods and not 15.

Compute that new Williams %R value and with the end of each period keep on doing that but only use the previous 14 periods as your data.

Key Levels of Williams %R

So the Williams %R measures that closing price relative to that high and low range across a certain time period which is usually 14 periods or days and it ranges from 0 to -100.

As for the key levels or points in that chart, well overbought conditions are typically considered to be around -20 whereas oversold conditions show around -80 on that scale.

How to Use Williams %R in Trading

By now you must have had a fair idea of what the Williams %R is all about but that isn’t enough if you’re going to trade with it as knowing how you can use it should be factored in too.

Identifying Overbought and Oversold Conditions

The first and probably the most obvious use case is it beng used to identify overbought and oversold conditions and as for what figures represent those that would be -20 and -80 which we already discussed earlier.

Knowing those conditions is important as that could make it easy for you to know when you’re going to enter or exit.

Spotting Reversals

As for identifying reversals, well once it hits those points where it shows that the market is either in an overbought or oversold condition then that means that the market is already at or nearing extreme levels and that it’s only a matter of time before things stabilize or take a turn in the opposite end. 

So basically once you see those conditions appear on the indicator then you may want to brace for a reversal.

Using Divergences

Sometimes the indicator will not match the price action like if you see price reaching new highs but you don’t see that being reflected in the indicator then it could mean that that momentum is weakening and that the market may be due for a correction.

Trend Confirmation with Williams %R

Well besides divergences or reversals theres one more thing that the indicator can be good for and thats trend confirmation.

If you’re just following trends and like to trade along them then it can be a good way to determine what the market is currently undergoing.

Using Williams %R with Other Indicators

Or if the indicator by itself isn’t measuring up to your requirements then you could always use it alongside with other indicators like the RSI or even the Stochastic Oscillator.

At least you’ll have some additional confirmation this way which you can never have enough of within the stock industry.

Williams %R Strategies for Different Trading Styles

The Williams %R indicator can have many uses but how would those translate or rather relate to some of the most popular trading styles you tend to see in the landscape? Lets find out.

Day Trading with Williams %R

Since day traders typically tend to focus more on short term profitability they may want a lookback period thats shorter than the default one and if thats the case then they could always adjust it to fit their needs.

Scalping and trend following are some strategies that you often see day traders using so you could factor that into your trading goals.

Swing Trading with Williams %R

But if its swing trading that you find more appealing then your focus is likely on medium to long term profitability so what you could do is either use the default period or just adjust to something longer. 

Strategies like crossovers may be more applicable to your trading style than day traders largely due to the extra time that you’ve given yourself to work with.

Long-Term Investing with Williams %R

But in case you’re in for the long haul then you’ll likely be holding on to those positions longer too so naturally your lookback period may change like with swing and day traders and strategies like divergences may suit you more.

Advantages and Limitations of Williams %R

Knowing both the pros and cons of this indicator should be one of the first things on your mind when considering it.

After all you may be better equipped to mitigate its limitations or drawbacks that way all while making the most you possibly could out of it.

Benefits of Using Williams %R

Starting with those benefits its simplicity stands out in that its not that hard to get into or grasp.

Second it can be a reasonably good way to discern overbought and oversold conditions especially if those markets are trending and finally it can be good for some simple trend gauging too.

Limitations of Williams %R

The main drawback with this one largely boils down to how the possibility for false signals is still there in that reversals and divergences may not always occur so you have to plan around that.

Conclusion

If you know what you’re doing then the Williams %R can be a valuable indicator despite its flaws, giving you some decent trend identification and market sentiments.

But nonetheless you may still want to consider using other indicators with it.

Any additional confirmation you could get wont hurt after all.