What is Williams R Indicator?

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  • 20 Oct 2023
What is Williams R Indicator?

Key Highlights

  • The Williams%R indicator swings back and forth between the values of 0 and -100.

  • It gives an overbought signal when its value rises over -20.

  • It produces an oversold warning when its value is lower than -80.

  • Signals of overbought and oversold conditions indicate that the price has reached extreme levels.

Williams%R, also referred to as the Williams Percentage Range, is a momentum indicator to determine the best times to enter and exit positions. Its values range from 0 to -100. 0 represents an overbought market and -100 represents an oversold market. The general consensus among traders is that a move over -20 in the direction of 0 indicates an overbought underlying market. Further, a move below -80 in the direction of -100 indicates an oversold market. The overbought and oversold signs are displayed in the Williams%R beneath the price graph in the price graph below.

The formula used to calculate Williams%R is similar to the Stochastic Oscillator:

%R = (Highest High - CurrentClose) / (Highest High - Lowest Low) x -100

Here; Highest High = Highest High for the user defined look-back period.

Lowest Low = Lowest Low for the user defined look-back period.

Notably, the precise inverse of the preceding formula, multiplied by 1, is also frequently used. Both calculations are valid for this indicator.

Follow the guidelines while calculating William%R.

  • To compute the William%R use price for the previous 14 days or other time periods.
  • Keep track of the high and low for each of the 14 periods.
  • On the fourteenth period, note the current price, the maximum price, and the lowest price. You may now use the formula to perform the required substitution.
  • Note the present price, the maximum price on the fifteenth period, and the lowest price throughout the previous fourteen periods (excluding the fifteenth period). Make a Williams%R calculation.
  • Use just the numbers from the previous 14 periods to calculate the new Williams%R at the end of each period.

Williams%R is used as a momentum indicator to assess a stock's overbought and oversold levels. A reading above -20 indicates overbuying, while one below -80 indicates overselling. Simply put, overbought that the price is close to the highs and lows of its recent range. An oversold condition means the price is close to the lows. When both the price and the indicator leave the overbought and oversold range, it is used to get trade signals Traders might watch for the Williams%R indicator to dip below the threshold of -80 during an upswing. When the price starts to increase and the indicator starts to move back over the -80 level, it can be a sign that the price is starting to move upward once more. The same principle may be used while trading during a decline. When the Williams%R indicator crosses the -20 threshold, watch for the price to begin falling and the Williams%R to return below the -20 threshold to signal a potential continuation of the downtrend.

Momentum Failures

The traders can also witness momentum failures. The price will frequently increase to or above the threshold of -20 during a strong upswing. The rising price momentum is in trouble, and a more significant price decrease may follow, if the indicator declines and is unable to rebound above the level of -20 before falling once more. The same is true for downtrends, which frequently see readings at or below the level of -80. If the indicator is unable to get to the low mark levels before falling, this may indicate that the price is about to increase.

The two common Williams%R trading strategies are as follows.

  • Buying assets when the indicator goes above -80

  • Selling an underlying asset when the indicator moves below -20 are.

A trader would believe that the price is now bullish and that there will be an upward rebound if the market climbed above -80 and towards 0. They might guess that the price of the underlying asset will rise more in this situation by going long.

The overbought signal may indicate that a trader should sell their position in order to get a profit when the Williams%R crosses above -20. A trader may hold his position until the Williams%R crosses above -20.

On the other side, a trader may interpret a move from -20 to -100 as a hint that the market is moving in the other direction. They might guess that the price will keep falling in this situation by taking a short position.

The Williams%R would most likely remain below -80 until a trader closed out their short position. They might now use the oversold signal as a hint to cut their losses and close out their short position.

There are basically two things you must keep in mind while trading using the Wiliams % R indicator.

  1. It's crucial to remember that overbought or oversold signals on the Williams%R do not always mean a reversal of market trends.
  2. An oversold signal might indicate that the underlying market price is close to its prior lows. Further, an overbought signal could indicate that it is towards the highs of its previous range.

The key differences between Williams %R and Stochastic Oscillator include the following.

  1. The Williams%R moves between 0 and -100. It displays the market's close in proportion to its greatest high during the look-back period. The Fast Stochastic Oscillator, on the other hand, oscillates between 0 and 100. It provides a market's near level in respect to the lowest low.
  2. The size of their indicators also differs from one another. Contrary to the stochastic oscillator, Williams%R has a reversed scale. It displays the connection between the closing price and the price range at a certain moment.

Here’s a quick comparison of Williams %R and Stochastic Oscillator.

Feature Williams %R Stochastic Oscillator
Range0 to -1000 to 100
ScaleReversedNot reversed
MeasuresClosing price in proportion to the greatest highClosing price in relation to the lowest low
Look-back periodAdjustableAdjustable
Formula(Highest high - Close) / (Highest high - Lowest low) * 100(Close - Lowest low) / (Highest high - Lowest low) * 100
InterpretationA reading below -20 indicates that the market is oversold, while a reading above -80 indicates that the market is overbought.A reading below 20 indicates that the market is oversold, while a reading above 80 indicates that the market is overbought.
  1. The following are a few limitations of William%R. The indicator's overbought and oversold markings do not signify the occurrence of a reversal. Since prices regularly increase to or above historical highs during a strong rise, overbought marking is used to identify uptrends.
  2. The indicator may also be very responsive, which causes it to send out a lot of false indications. For instance, the indicator may be oversold and begin to rise. However, the price might not increase. This is because the indicator only looks at the most recent 14 days or periods. As time goes on, the present price's position in relation to the large and small in the look-back period changes. This may happen even though price would not have changed.

Conclusion

Technical analysis uses the Williams%R indicator (%R) to measure momentum. Momentum readings may be used to spot oversold or overbought levels. It is crucial to keep in mind that overbought or oversold levels typically suggest the strengthening of the existing trend. They may not be a hint of trend reversals. By employing historical analysis to look at previous instances of the specific financial instrument that is being traded or analysed, it is feasible to distinguish between these potential outcomes the best manner possible. Similarly, the factors that determine overbought and oversold levels may also be modified using historical data. Larry Williams established the conventional ranges of 0 to -20 (overbought) and -80 to -100 (oversold). These typical levels might not be suitable in every circumstance depending on many things like volatility or market news.

FAQs On Williams R indicator

The common time frame used for the Williams%R indicator is 14 periods. However, traders can change it to fit their analytical and trading style.

Yes, you can combine the Williams%R indicator with other technical indicators such as moving averages or trendlines, to confirm signals and make wiser trading decisions.

Yes, there are some Williams%R variations that employ other formulas or time periods. The Fast%R and Slow%R are some examples. These variations give different sensitivity levels to market movements l.

No, like technical indicators, the Williams %R may perform better in certain market conditions than others.

Yes, you can apply the Williams %R indicator to various financial assets like stocks, currencies and commodities to analyse their price movements.

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