Being a successful trader involves being able to analyze and interpret a wide array of graphs and price charts. The use of technical indicators can help decipher the continuous changes in a security’s price into known patterns, and can thereby help you predict the future performance of that security’s price. One technical indicator used by traders when analyzing an instrument’s price is the Williams %R or the Williams Percent Range.
The Williams %R is a momentum oscillator that is scaled between 0 and -100 and indicates whether a financial instrument is in an overbought or oversold condition. Even though overbought and oversold conditions do not necessarily mean that a reversal is imminent, the Williams %R can give traders valuable insights and confirmation signals when deciding to enter or exit trades.
The Williams %R is not necessarily a great indicator on which to solely base a trade, as it only tells part of the picture when analyzing an instrument’s price performance. It is closely related to the Fast Stochastic Oscillator and should be used in conjunction with other technical analysis tools to find the ideal opportunities to make a trade.
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Table of Contents
How to Read Williams %R Indicator?
As every technical tool and indicator operates on a different scale and measures different factors of a financial instrument’s historical price performance, it is crucial to understand what goes into each calculation and what the final reading measures. Although Williams %R is extremely similar to the Stochastic Fast Oscillator, it is calculated, and hence interpreted, a bit differently.
To accurately ingest the readings from the Williams %R Indicator, there are three topics that you must fully understand. These are –
- Construction of Williams %R Indicator
- Williams %R Indicator Calculations
- Interpreting Williams %R Signals
In the upcoming sections of this article, we will discuss all three of these topics with every possible detail that you need to know to start trading this pattern effectively in no time.
Construction of Williams %R Indicator
Structurally, Williams %R Indicator is simply a line graph that fluctuates between a reading of 0 and -100. There are several unique parts of a financial instrument’s past price performance that are leveraged in this indicator’s behind the scene calculations. Listed below are these inputs that feed into the calculations for this indicator –
- Lookback Period – This is the timeframe on which all indicator calculations are based. With standard or default indicator settings, the lookback period is most likely to be set as the past 14 trading sessions.
- Highest High – This is the highest price in the lookback period.
- Lowest Low – This is the lowest price in the lookback period.
- Close – This is the most recent closing price.
When combined in the below-described calculations, these unique values are used to compute the Williams %R.
Williams %R Indicator Calculations
Even though most serious traders use software charting platforms to perform behind the scene analysis to generate indicator readings, the calculation for Willams %R is not overly complicated.
You can easily calculate this indicator by following the steps listed below –
- Determine the lookback period. As mention in the previous section, the 14 trading session period is commonly used as the standard timeframe for Williams %R calculations. However, depending on your trading environment, you can choose a choose any different value for the lookback period.
- After choosing the lookback period, record the highest and lowest price observed during this period.
- At the end of the lookback period, record the final closing price. If using the standard 14-session lookback period, this would be the closing price at the end of the 14th trading session.
Once the above steps are taken, you can simply plug in these values into the following formula to compute the Williams %R:
Williams %R = [(Highest High – Close) / (Highest High – Lowest Low)] x (-100)
To keep your Williams %R up to date, omit the oldest value in the lookback period and continue to perform this above-stated calculation to monitor how the momentum of price changes is developing.
Interpreting Williams %R Signals
The Williams %R is quite simple to interpret once the indicator reading is calculated. It simply lets the trader know where the current price is relative to the selected lookback period, which can shed some light as to whether the financial instrument is being overbought or oversold.
The following buckets of indicator reading can help you distinguish between overbought and oversold conditions:
- An indicator reading between Zero and -20 indicates an overbought condition. This means that the current price is near the high of the given lookback period.
- An indicator reading between -100 and -80 indicates an oversold condition. This means that the current price is far from the high price of the given lookback period.
- An indicator reading between -20 and -80 indicates that the instrument’s price is trading at a level commensurate with its perceived value.
As Williams %R is a momentum indicator, it is likely to return an extreme value during periods of a strong uptrend or downtrend in an instrument’s price. Powerful uptrends often return values above -20 as new price highs are regularly met, and powerful downtrends often return values below -80 as prices regularly drop amid a selloff.
Therefore, it is extremely important that you fully understand the market environment that you are trading in, before integrating this, or any other technical indicator, in your trading strategy.
How Reliable is the Williams %R Indicator in Trading?
While an excellent indicator for confirming price momentum, Williams %R is not all that reliable for making trade decisions when used in isolation. There are several reasons for this:
- Many traders intuitively believe that an overbought asset means that its price is too high and is due for a price decrease, while oversold assets are undervalued and due to seeing increases in price. Therefore, as Williams %R measures overbought and oversold conditions, it is often used as a reversal indicator. However, it is actually a very poor indicator of price reversals. This is because when in a strong uptrend, the Williams %R tends to give an extreme overbought reading; and in a strong downtrend, it continuously gives an oversold signal.
- Many traders are confused by and do not like the Zero to -100 scale upon which Williams %R is calculated. It takes extra thinking to remember that readings that are above the numeric value of -20 are actually bigger and that the readings below the numeric values than -80 are smaller. This very often leads to interpretation errors for some traders. A positive Zero to 100 scale would seem to make more sense.
- Some traders do not like the fact that the current price is included in the lookback period. If the current price were the high for the lookback period, regardless of whether the high was $.01 or $100 higher, the reading would come back at zero, indicating a highly overbought condition. This would seem to minimize the possibility of accurately identifying an extreme breakout when in progress, causing traders to miss out on potentially profitable trades.
Hence, Williams %R needs to be analyzed in the proper context, with the negative readings given extra thought to make sure the correct interpretation is being made.
Improving Reliability of Williams %R in Trading
Even though like all other tools used in Technical Analysis, Williams %R has its limitations, its reliability can be considerably improved when assessed in the proper market context and used in combination with other complementary tools and indicators.
Described below are few important considerations that can enable you to boost the accuracy of signals produced by the Williams %R Indicator –
- First and foremost, Williams %R is at its best when used to capitalize on brief corrections in a dominant prevailing trend. For example, if a Williams %R calculation were to calculate a reading below -80 during a strong uptrend in a financial instrument’s price, this may be a great time to buy as you theoretically would be getting in at a lower point than what is to be seen in the coming days.
- On the same token, a financial instrument that is amid a strong downtrend and sees a Williams %R calculation come back at a value higher than -20 may be a great opportunity to short, as the price is more than likely to continue to drop in the days to come.
- Another great way to improve the reliability of Williams %R is by combining it with other momentum oscillators, such as the Relative Strength Index (RSI), Stochastics, and/or Moving Average Convergence Divergence (MACD) to help confirm or reject the strength and the direction of price momentum signaled by this indicator.
Additionally, to gather the required data to calculate the Williams %R, a great chart to look at is the candlestick chart. Not only does the candlestick chart give a visual representation of whether or not the financial instrument is in the midst of a trend, but readily provides information concerning high price, low price, opening price, and closing price when scaled to your lookback period.
How to Trade Using the Williams %R Indicator?
Now that you understand the basic tenets of the Williams %R Indicator, how to calculate it, how to interpret those calculations, and what limitations may come with using this technical indicator, it is time to put that knowledge to work and implement it into a trading strategy that you can trade.
Listed below are several popular trading strategies in which Williams %R is known to work really well –
- Scalp Trading Strategy
- Day Trading Strategy
- Swing Trading Strategy
- Buy and Hold Trading Strategy
- Breakout Trading Strategy
- Reversal Trading Strategy
Now, without further ado, let us briefly discuss each of these six trading strategies and understand how Williams %R can be used in their execution.
Trading Strategy 1: Scalp Trading Strategy
Scalp Trading, famously known as Scalping, is a trading strategy under which the trader buys a huge volume of an asset, holds it for a relatively short duration (ranging from few minutes to few hours), and then sell it for profit.
Scalpers, in comparison to traders leveraging other trading strategies, are generally willing to accept smaller percentage gains when closing a position. This is because due to the large size of their position, they are able to lock desirable profits on their trades even in a relatively shorter duration of time.
If scalping is your strategy of choice, using Williams %R in the following instances will help you in making profitable trading decisions:
- Determining Trade Entry – Bullish traders will want to enter a trade when Williams %R moves below -80 in an uptrend, while bearish traders will want to enter a trade when Williams %R moves below -20 in a downtrend. As scalpers need volatility in an instrument to make their strategy work, they should be ready to execute the trades during the early hours once the market opens. This is because, generally speaking, the first hour of the day is when the most significant price swings occur.
- Determining Stop loss Target – Scalpers have minimal leeway when setting a stop loss, as their strategy of capturing small gains over a large volume will be greatly undermined if a trade unexpectedly moves too far in the wrong direction. Therefore, long traders should set their stop-loss no more than 0.5% below the buy-in price, while short traders should set their stop-loss no more than 0.5% above the buy-in price.
- Determining Take Profit Target – Again, since scalpers are willing to take smaller percentage gains over a large volume as their means of making a profit, they cannot afford to get greedy when setting take profit targets. A margin 2% above the buy-in price for a long trade – or 2% below for the short trade – is a reasonable take profit target for scalpers. That being said, when trading with this strategy, anything between zero and 2% should be acceptable depending on your risk tolerance and trade volume.
Trading Strategy 2: Day Trading Strategy
Day Trading is an extremely similar trading strategy to scalping, with the main difference being that day traders are willing to hold their positions a little longer than scalpers. Theoretically, though, any trader who buys and sells a position within the same day can be considered a day trader.
If you are a day trader, you can use Williams %R in the following instances to make informed trading decisions that have the potential to deliver profitable trades:
- Determining Trade Entry – Like scalpers, day traders need to be ready to enter trades during the early hours of market opening so that they can capitalize on high market volatility. Also, like scalpers, long traders will want to see the Williams %R fall below -80 during a strong uptrend, and short traders will want to see the Williams %R move above -20 in a strong downtrend before making their trades.
- Determining Stop loss Target – Like scalpers, day traders deal in small profits over high volumes and simply cannot afford to let bad trades decimate their bankroll. Therefore, long day traders should set their stop-loss no more than .5% below the buy-in price, while short day traders should set their stop-loss no more than .5% above the buy-in price.
- Determining Take Profit Targets – Also like scalpers, day traders do not have the luxury of getting greedy in their take profit targets. While a 2% move above or below the buy-in point is a good target, day traders have a few more hours in the day to play with, so if you are okay with a little extra risk and are liking a trend, you may extend this range a bit further.
Trading Strategy 3: Swing Trading Strategy
Swing trading is another short-term trading strategy that involves holding a position in a financial instrument for a few days, or up to a few months. Although swing traders may trade in higher volumes and accept lower returns than long-term investors, the volume of their trades is generally lower, and the take profit targets of their trades are generally higher than that of the scalpers and day traders.
If swing trading is your strategy of choice, you can trade using Williams %R by following the below stated guidelines:
- Determining Trade Entry – Remembering that Williams %R is at its best for capitalizing on short-term corrections during overarching trends, swing traders may want to use Williams %R in conjunction with an exponential moving average – still using the -80 and -20 benchmarks for long and short trades, respectively – to find an ideal time to jump on the train.
- Determining Stop Loss Target – Swing traders will have a little more ability to wait out a bad trade than will scalpers or day traders, but not much. Swing traders will want to put their stop loss at around 1% below the buy-in price for long trades and 1% above the buy-in price for short trades. Utilizing other technical indicators and tools, such as – support and resistance, for determining stop-loss targets with swing trading is also a good idea.
- Determining Take Profit Target – Swing traders will want to take a little more profit than scalpers or day traders. Something around 2-4% above the buy-in price for long trades and 2-4% below the selling price for short trades is an acceptable range, with some leeway acceptable based on your risk tolerance. Additionally, just as with stop-loss target determination, you can leverage other complementary tools in technical analysis, when identifying potential take-profit targets under this strategy.
Trading Strategy 4: Buy and Hold Trading Strategy
It can be argued that buy and hold is not necessarily a trading strategy, but a passive form of long-term investing. Nonetheless, buy and hold does involve the acquisition of financial instruments with an eye on making a profit, so I believe it should still be included in this list.
The most significant point to remember when using Williams %R for a buy and hold strategy is that the lookback period needs to be adjusted to scale. You may want to use a period of 8 weeks, or even a year, as opposed to the standard 14 days used by more active traders.
Once this is resolved, you can leverage the following tips when using the Williams %R to maximize the potential of a buy and hold strategy:
- Determining Trade Entry – Even though the lookback scale has been adjusted, you still want to enter long trades when the Williams %R falls below -80 in an uptrend. Buy and hold strategies rarely involve making short trades, as short trading is extremely risky over the long-term as most assets will increase in price when given enough time.
- Determining Stop Loss Target – Buy and hold may not have a set stop loss, as it involves riding market turbulence until gains eventually come. However, if the buy and hold trader is unwilling to face the prospect of being stuck in a rut for a long time, multiple unique readings of a Williams %R below -80 could indicate that the instrument is no longer in an uptrend. This can be used as a signal to exit a trade, should you decide to cut your losses.
- Determining Take Profit Targets – When buying and holding, you will want a healthy return before surrendering your position, with gains of at least 8% being standard before liquidating and moving to something else.
Trading Strategy 5: Breakout Trading Strategy
The Breakout Trading Strategy is a very specific strategy that may be contained as a subsection of any of the previously discussed strategies, with a high likelihood of being used by swing traders.
The Breakout Trading Strategy, for long traders, involves waiting for an instrument to post consecutive days of closing above a previous resistance level and buying in with the expectation that explosive price gains are imminent. The same concept in the opposite direction applies to short traders waiting for a price to fall below a support level.
As mentioned earlier, including the current day’s closing price as part of the lookback period limits Williams %R’s effectiveness for traders using a Breakout Trading Strategy, as readings of 0 or -100 do not conclusively indicate the strength of a record price.
Therefore, if the current price is the highest high or lowest low of the lookback period, many traders will modify their calculation of Williams %R to use the highest high or lowest low of the 14 days (assuming a 14-day lookback period) before the current record. Meanwhile, they will use the current price on the 15th day to get an indication of strength, with the final Williams %R calculation being lower than -100 or higher than 0 in these breakthrough situations.
To improve the reliability of using Williams %R to trade breakout, it is best to pair it with pennants, flags, or channel patterns, all of which have a history of being reliable indicators of potential breakouts once resistance or support levels are broken.
To further enhance the reliability of Williams %R to trade breakouts, you can leverage the following tips:
- Determining Trade Entry – You will want to trade a potential breakout when you see consecutive calculations of Williams %R at 0 or -100. If you are using the modified calculation, long traders will want to see consecutive days of the Williams %R increasing above zero, while short traders will want to see consecutive days of the Williams %R decreasing below -100.
- Determining Stop Loss Target – Any indication that the perceived breakout was false is a good time to stop further losses. When trading Williams %R, a calculation that falls back below zero (in the case of bullish trade) or above -100 (in the case of bearish trade) may be a good time for traders to exit their trades.
- Determining Take Profit Target – Trading breakouts means that you are in the market to capture explosive gains. Therefore, a conservative take profit target would be 10%, with many breakout traders wanting to get an even higher return.
Trading Strategy 6: Reversal Trading Strategy
As its name implies, the Reversal Trading Strategy involves entering a trade when you feel like a reversal in an instrument’s price trend is imminent. For long traders, this would mean buying in at a low point when you feel like the price is due for appreciation; for short traders, it means buying in at a high point when you feel like the price is set to drop.
Although the Williams %R Oscillator conclusively indicates overbought and oversold conditions, these conditions do not necessarily indicate a reversal on the horizon. This makes Williams %R a risky tool when used in isolation to predict reversals.
To increase its effectiveness with Reversal Trading Strategy, Williams %R should be combined with strong reversal patterns, such as – the Reversal Chart Patterns, the Harmonic Patterns, or the Reversal Candlestick Patterns. Furthermore, when trading reversals, you should closely monitor volume, as drastic changes in this arena are also likely indications of an upcoming reversal.
As a supplementary tool, though, Williams %R can help reversal traders in the following ways:
- Determining Trade Entry – As Williams %R is best used to enter trends during a correction, a single calculation below -80 in an uptrend or above -20 in a downtrend will not likely indicate a reversal. However, several such calculations in close proximity could indicate that a trend is losing steam, marking possible times to enter trades for reversal traders.
- Determining Stop Loss Target – If short traders are trading a reversal of an uptrend, but a subsequent Williams %R reading comes back higher than -20, they should consider exiting the trade. Likewise, long traders trading a reversal of a downtrend should consider exiting the trade when a subsequent Williams %R calculation comes back less than -80.
- Determining Take Profit Target – While reversal traders may be willing to take less explosive profit margins than breakout traders, they still want a higher percentage than scalpers or day traders. A take profit in the 5-10% range is acceptable for reversal traders, depending on their individual risk tolerance.
Advantages and Limitations of Trading Williams %R
Similar to all other technical analysis tools and patterns, Williams %R has its advantages and drawbacks. While a handful of these have been discussed throughout the article, let us briefly discuss various pros and cons of using Williams %R in making trading decisions in the upcoming sections of the article.
Advantages of Trading Williams %R
Listed below are several key advantages of trading Williams %R that you should note when leveraging the signals from this indicator in making trading decisions:
- It is relatively easy to spot overbought and oversold conditions in a financial instrument’s price using the Williams %R Indicator.
- It effectively identifies corrections in a heavily trending instrument, thereby making for strong entry points for traders.
- Arithmetically, if needed, it is easy enough to calculate Williams %R readings on the price chart of a security.
- On relative terms, it is a simple to understand and interpret indicator. The single Zero to -100 scale is not overly complicated, as long as you remember how to deal with negative integers.
- It is a good indicator of momentum to use in combination with a wide array of other technical analysis tools and patterns to help predict the future price performance of a security.
Limitations of Trading Williams %R
Listed below are several key limitations of trading Williams %R that you should note when leveraging the signals from this indicator in making trading decisions:
- Williams %R Indicator has little value when used in isolation. This is because the indicator has limited predictive value for breakouts, and can mislead traders into thinking a reversal is imminent.
- It is a lagging indicator, meaning that it measures historical price, which may not be of much help to highly active traders, such as scalpers, who need real-time and forward-looking information.
- The Zero to -100 scale is confusing for those who get tripped up by negative integers.
- If the current price is a higher-high or a lower-low, it does not adequately show how strong the breakout is, leaving some traders to feel the need to modify the indicator formula.
- It, in essence, is identical to Stochastic Momentum Indicators, which leads to confusion for some traders.
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Conclusion
The Williams %R indicator is a momentum oscillator that gives traders information as to the strength of a financial instrument’s price trend, signaling overbought and oversold conditions. It is at its best when detecting small corrections in the price of a heavily trending instrument, allowing traders to enter trades at a more favorable price.
While not extremely reliable when used in isolation, Williams %R can be used with tools such as pennants, flags, or channels to help traders confirm and identify a potential breakout. Finally, using this indicator with Harmonic Patterns, Reversal Chart Patterns, and Reversal Candlestick Patterns can also help traders spot potential points of trend reversal.
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