Williams %R Indicator

Williams %R is a simple but effective momentum oscillator and was described by Larry Williams for the first time in 1973.

It shows the relationship of the close relative to the high-low range over a set period of time.

First Some History on Larry Williams

Some of Williams tools of trading have also been published in magazines such as Active Trader, Futures Magazine, and Technical Analysis of Stocks & Commodities. Larry Williams has also been featured in Barron's, The Wall Street Journal, Forbes, Fortune, and Vanity Fair.

Calculation of the Williams %R

Typically, Williams %R is calculated using 14 periods and can be used on intraday, daily, weekly or monthly data. The time frame and number of periods will likely vary according to desired sensitivity and the characteristics of the individual security.

The scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold.

How Williams %R is created.

William %R shows the relationship of the close relative to the high-low range over a set period of time. The nearer the close is to the top of the range, the nearer to zero (higher) the indicator will be.

The nearer the close is to the bottom of the range, the nearer to -100 (lower) the indicator will be. If the close equals the high of the high-low range, then the indicator will show 0 (the highest reading).

If the close equals the low of the high-low range, then the result will be -100 (the lowest reading).

Market Psychology

Each price is a consensus of value among traders. The recent high range shows the bulls or buyers maximum power. The low of the recent range reflects the maximum power of the bears during that trading range. The most important consensus is as always the closing price.

Williams %R compares each closing price to the recent range indicating whether bulls can close the price near the top of the range, or bears can close the market at the bottom of the price.

Price may be pushed higher or lower during the day but the Williams %R will indicate which group is actually capable of closing the market.

If bulls cannot close the market near the top of a rally they are weaker than they seem and this creates a shorting opportunity. If bears cannot close the market near the lows during a decline then they are weaker than they appear and this creates a buying opportunity.

Trading Rules

Divergences between price and Williams %R rarely occur, when they do these divergences identify the best trading opportunities using Williams %R.

Below is a 1hr price chart of the EUR/USD with Williams %R set at 14 showing bearish divergence:

Forex

The A-B line indicates the price advancing and the C-D line indicates the Williams %R nudging downwards showing bearish divergence. You would look for opportunities to short the market when bearish divergence occurs on the Williams %R.

Below is a 1hr price chart of the EUR/USD with Williams %R set at 14 showing bullish divergence:

FX

The A-B line indicates price declining and the C-D line indicates the Williams %R nudging upwards showing bullish divergence. You would look for opportunities to go long the market when bullish divergence occurs on the Williams %R.

There are also less significant ways to trade Williams %R but this method is oneof the most poular. The second way to use Williams %R is to identify overbought and oversold conditions.

More on the Williams %R

It is important to remember that overbought does not necessarily imply time to sell, and oversold does not necessarily imply time to buy. A security can be in a downtrend, become oversold and remain oversold as the price continues to trend lower. Once a security becomes overbought or oversold, traders should wait for a signal that a price reversal has occurred.

As always, price reversal confirmation can also be accomplished by using other indicators or aspects of technical analysis with Williams %R.

One method of using Williams %R might be to identify the underlying trend and then look for trading opportunities in the direction of the trend. In an uptrend, traders may look to oversold readings to establish long positions. In a downtrend, traders may look to overbought readings to establish short positions.

May The Trade Be With You

Danie van Wyk

Williams %R Indicator

 

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.