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 is commonly used to find entry and exit points in the market. It is, however, prone to false signals as it moves between overbought and oversold. For that reason, using the indicator alongside other price and trend methodologies can help mitigate some of the false signals.
BREAKING DOWN ‘Williams %R’
The Williams %R, developed by publisher Larry Williams, is a technical analysis oscillator. In practice, it compares a stock’s closing price to the high-low range over a specific period, typically 14 days.
The formula to calculate the Williams %R is as follows:
%R = (highest high – closing price) / (highest high – lowest low) x -100
In this formula, highest high represents the highest price over the look back period and the lowest low is the lowest price over what is known as the look-back period. Determining the look-back period is the first step a trader to take. Thereafter, the analyst or trader can determine whether a stock or commodities market is trading near the high or the low, or perhaps somewhere in the middle, of its most recent trading range.
The Williams %R gained notoriety as an indicator because of its penchant for signaling market reversals at least one or two points in the future. Anticipating when market reversals may occur is invaluable for analysts and traders, as is having a way to determine overbought and oversold market conditions. A security is overbought when the indicator is above -20, and the security is oversold if the indicator is below -80. Overbought refers to the price trading near the top of the 14-day range, while oversold refers to the bottom of the range. Overbought and oversold periods can be lengthy, should the price continue to rise or fall.
The Williams %R vs the Fast Stochastic Oscillator
The Williams %R represents a market’s closing level versus the highest high for the look-back 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 the inversion by multiplying the raw value it yields by -100. As a result, the Williams %R and the Fast Stochastic Oscillator produce the exact same lines. The only difference between the two is how the lines are scaled.
Williams used a 10 trading day period and considered values below -80 as oversold and above -20 as overbought. But they were not to be traded directly, instead his rule to buy an oversold was
%R reaches -100%.
Five trading days pass since -100% was last reached
%R fall below -95% or -85%.
or conversely to sell an overbought condition
%R reaches 0%.
Five trading days pass since 0% was last reached
%R rise above -5% or -15%.
The timeframe can be changed for either more sensitive or smoother results. The more sensitive you make it, though, the more false signals you will get.
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