Williams %R Indicator Overbought and Oversold Trade Signals

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Williams %R Definition and Uses

What is Williams %R?

Williams %R, also known as the Williams Percent Range, is a type of momentum indicator that moves between 0 and -100 and measures overbought and oversold levels. The Williams %R may be used to find entry and exit points in the market. The indicator is very similar to the Stochastic oscillator and is used in the same way. It was developed by Larry Williams and it compares a stock’s closing price to the high-low range over a specific period, typically 14 days or periods.

Key Takeaways

  • Williams %R moves between zero and -100.
  • A reading above -20 is overbought.
  • A reading below -80 is oversold.
  • An overbought or oversold reading doesn’t mean the price will reverse. Overbought simply means the price is near the highs of its recent range, and oversold means the price is in the lower end of its recent range.
  • Can be used to generate trade signals when the price and the indicator move out of overbought or oversold territory.

The Formula for the Williams %R Is:

How to Calculate the Williams %R

The Williams %R is calculated based on price, typically over the last 14 periods.

  1. Record the high and low for each period over 14 periods.
  2. On the 14th period, note the current price, the highest price, and lowest price. It is now possible to fill in all the formula variables for Williams %R.
  3. On the 15th period, note the current price, highest price, and lowest price, but only for the last 14 periods (not the last 15). Compute the new Williams %R value.
  4. As each period ends compute the new Williams %R, only using the last 14 periods of data.

What Does Williams %R Tell You?

The indicator is telling a trader where the current price is relative to the highest high over the last 14 periods (or whatever number of lookback periods is chosen).

When the indicator is between -20 and zero the price is overbought, or near the high of its recent price range. When the indicator is between -80 and -100 the price is oversold, or far from the high of its recent range.

During an uptrend, traders can watch for the indicator to move below -80. When the price starts moving up, and the indicator moves back above -80, it could signal that the uptrend in price is starting again.

The same concept could be used to find short trades in a downtrend. When the indicator is above -20, watch for the price to start falling along with the Williams %R moving back below -20 to signal a potential continuation of the downtrend.

Traders can also watch for momentum failures. During a strong uptrend, the price will often reach -20 or above. If the indicator falls, and then can’t get back above -20 before falling again, that signals that the upward price momentum is in trouble and a bigger price decline could follow.

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The same concept applies to a downtrend. Readings of -80 or lower are often reached. When the indicator can no longer reach those low levels before moving higher it could indicate the price is going to head higher.

The Difference Between Williams %R and the Fast Stochastic Oscillator

The Williams %R represents a market’s closing level versus the highest high for the lookback period. Conversely, the Fast Stochastic Oscillator, which moves between 0 and 100, illustrates a market’s close in relation to the lowest low. The Williams %R corrects for this by multiplying by -100. The Williams %R and the Fast Stochastic Oscillator end up being almost the exact same indicator. The only difference between the two is how the indicators are scaled.

Limitations of Using the Williams %R

Overbought and oversold readings on the indicator don’t mean a reversal will occur. Overbought readings actually help confirm an uptrend, since a strong uptrend should regularly see prices that are pushing to or past prior highs (what the indicator is calculating).

The indicator can also be too responsive, meaning it gives many false signals. For example, the indicator may be in oversold territory and starts to move higher, but the price fails to do so. This is because the indicator is only looking at the last 14 periods. As periods go by, the current price relative to the highs and lows in the lookback period changes, even if the price hasn’t really moved.

Williams %R Indicator: Overbought and Oversold Trade Signals

Williams %R is an indicator similar to the Stochastic Oscillator, but calculated a bit differently. Developed by Larry Williams the indicator reflects the difference between the high, low and the current price over a look back period. Generally that look back period is 14, which could based on any time frame, such as 1-minute, 5-minute, or hourly price bars, etc.

Williams %R

The indicator moves between 0 and -100. A reading between 0 and -20 shows the price is near its high over the look back period. A reading between -80 and -100 shows the price is near its low over the look back period.

Commonly these areas are called “overbought” (0 to -20) or “oversold” (-80 to -100), although these labels can be deceiving. As indicated, all these levels really mean is the current price is trading near the high of the look back or near the low. So just because something is overbought doesn’t mean you necessarily want to sell it, or just because something is oversold that you necessarily want to buy it.

Prices can remain in overbought or oversold territory for a long time, especially during a strong uptrend or downtrend respectively.

Trading Applications

One way to use the indicator is to watch for overbought levels and then a move back below the mid-line (-50). This provides a sell signal.

An oversold level and then a move back above the mid-line (-50) provides a buy signal.

Figure 1. S&P 500 15-Minute Chart with Williams %R Signals (click for full size)

In figure 1 the buy and sell signals are marked with vertical lines–green for buy and red for sell.

During strong moves and the indicator worked better. Since it will always lag behind the price, when the price movements are large, by the time the trader gets the signal there is still room to get in and make a profit.

During quiet conditions there are likely to be more false signals, where a buy or sell signal is given but the price doesn’t follow through in that direction.

Instead of using these as trade signals though, they are likely better used as just an indication that the trend has shifted.

Using price analysis can also help cut down on the number of false signals. If there is a strong uptrend on the chart, then only trade the buy signals. If there is a strong downtrend on the chart, only trade the sell signals (see: When a Trend is Trustworthy and When It Isn’t).

The Williams %R can also be used to gauge momentum. During a downtrend you want to see the price continually reach below -80 to confirm that the downtrend has strength. If the price stops reaching -80 or below, then it signals that the downtrend is losing strength and an upward reversal may be coming.

During an uptrend you want to see the indicator move above -20 on a regular basis. If it can’t do it, it shows the uptrend is losing strength.

Figure 2 shows a few examples of this method.

Figure 2. Determining Momentum with Williams %R (click for full size)

Starting from left to right, we see a strong drop in the price and indicator, and a small rally on the indicator can’t get back to -20, which helps confirm momentum is strong down.

In the middle example, the indicator moves from oversold to overbought (price is in a small range) but when the indictor moves back down it barely gets -80 (higher than prior indicator lows), showing some underlying strength. This warned that the price could pop higher, which it did.

On the right we have a strong uptrend and indicator remains overbought for some time. It then falls below -50 and on the rally back just barely makes it to -20. This high on the indicator was significantly lower than the prior highs, indicating the trend had lost some steam. From there the price drifted lower.

Final Word

While it is possible to use this indicator for trade signals, it’s not recommended. Rather use the indicator for confirming other analysis you are doing and to spot underlying weakness or strength. Adjust the parameters of the indicator, such as giving it a shorter or longer look back period, to align it with your strategies and analysis methods. If you do decide to use the indicator for trade signals, use it during trends and when price is moving strongly. You may also opt to use slightly different levels, or techniques for entering and exiting trades than the standard applications mentioned above.

Trading with Williams’ %R: How to Spot Trading Opportunities?

The Williams’ %R (usually called the Williams Percent Range or Williams Overbought/Oversold Index) is a simple, yet effective technical analysis tool that excels at determining overbought and oversold levels. This indicator would work perfectly on intraday, daily, weekly and monthly time intervals. Being an oscillator, it moves from 0 to -100 and is very close to the Stochastic in the way it works. In order to use %R effectively, you will have to understand how it works, what it is capable of and what are the limitations.

How it works?

Williams’ %R is an oscillator-type indicator, that is quite similar in its nature to the Stochastic Oscillator with the most notable difference being their scales. The Williams Percent Range uses a 0 to -100 scale, while for the Stochastic the readings vary from 0 to 100. The Stochastic can also boast a moving average, used as a source of crossover signals.

Williams’ %R compares the current price to the prices over the lookback period

The period, that is used by %R by default, is 14 candles. The indicator will, therefore, cover the period of 14 hours for a 1H graph, and 14 weeks for a 7D graph. However, it can be changed to increase the sensitivity of the instrument (alternatively, to lower the number of false signals). The indicator shows how the current price compares to the highest price over a set period of time.

Now, to the indicator’s readings. When they get close to 0, it means that the current price is getting close to (or above) the highest price, observed during the selected period. When the opposite is true, and the indicator gets to the -100 threshold, the current price is lower than the lowest price of the respective period. Finally, when the readings gravitate to the middle of the channel, the current price is equal to the average price of the lookback period.

How to apply?

There are several ways to put Williams’ %R to work. This indicator is most commonly used to determine overbought/oversold levels, provide momentum confirmations and trade signals.

Overbought/oversold

When the indicator is above -20, the asset is considered to be overbought. When it falls below -80, the asset is oversold. The good thing is the indicator will use both readings as by default. You, therefore, don’t have to adjust the settings before putting the indicator into action. Don’t let the seeming simplicity of this tool fool you: overbought does not always mean the price is about to go down, just as oversold doesn’t necessarily mean that the price action will go through the roof.

Overbought/oversold levels can come in handy when determining optimal entry points

Of course, all trends are destined to reverse. Yet, overbought/oversold levels don’t tell you when to expect the reversal. Suchlike signals can be used to confirm readings, received from other indicators. Beware of false and late signals, however, as they are quite common when trading with a single indicator and no confirmations.

Momentum confirmations

In trading, momentum is just as important as the direction of the trend. A strong momentum means the trend is destined to last some more. Adversely, when the momentum becomes weaker, the trend runs out of its strength and can be expected to stagnate or even reverse. This kind of information is of great use to any trader.

Imagine you have spotted a newborn bullish trend. Should the %R reach -20 and stay above it, the current trend will probably last. If the opposite is true and %R stays below, the trend might be running out of steam and can, therefore, be expected to reverse. The same applies to the negative trends. When the indicator is below -80, the trend is stronger and can be expected to last. When it gets above the -80 threshold, the reversal is possible.

For two times in a row the positive trend runs out of momentum before %R could get to the overbought level

Possible limitations

As most other indicators, Williams’ %R should not be used on its own, as it will provide a lot of false and late signals. And as most indicators, it is also not capable of providing accurate signals 100% of the time. When working with the Williams Percent Range, some traders get out of the trend too early, losing a substantial portion of potential profit. It is, therefore, possible to keep the position open as long as the price is getting overall higher (lower for short positions), disregarding the signals provided by Williams’ %R. It is important to remember that it is still a trading tool, not a ready-to-use strategy.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

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