Table of contents
The world of technical analysis can seem dense and complex to newcomers. With countless indicators and strategies to choose from, it takes time to figure out where to start. However, some analysis tools rise above the rest in popularity and versatility. The Williams %R indicator is one such tool – a momentum oscillator packed with useful signals.
In this guide, we’ll break down everything you need to know about Williams %R. You’ll learn how it works, how to interpret its signals, effective trading strategies, and how it compares to other indicators like the RSI. With this knowledge in hand, you’ll be equipped to put Williams %R to work in your trading.
What is Williams’s %R, and how does it work?
Williams %R is a tool used to measure an asset’s closing price compared to its price range over a certain period. Its scale goes from 0 to -100, and when the reading is above -20, it means the market is overbought, while a reading below -80 suggests the market is oversold.
The logic here is that when an asset’s price is stretching to the very top of its range, it may be due for a pullback. On the flip side, when the price drops near previous lows in the range, it could bounce back up. Williams %R allows traders to identify these exhausted moves early.
The indicator formula is:
%R = (Highest High – Close) / (Highest High – Lowest Low) x -100
Where:
- Highest High = The highest high over the lookback period
- Lowest Low = The lowest low over the lookback period
- Close = The latest closing price
This gives a dynamic reading based on the asset’s price activity over an “x” number of periods. Shorter lookback lengths like 14 will make the indicator more sensitive, while longer lengths like 20 or 30 will smooth things out.
How to interpret Williams’s %R signals?
When Williams’s %R crosses above the -20 overbought threshold, it may signal upward momentum is slowing, and the price could fall. Readings below -80 indicate the price may have hit a floor and could rebound.
However, traders must remember overbought/oversold readings alone don’t guarantee a reversal. It takes other confirming signals to validate potential trend changes.
With experience, traders learn to spot reliable signals versus false alarms. For example, during uptrends, Williams’s %R often hits overbought temporarily before the rally extends. Significant highs or lows accompanied by spikes in volume strengthen the likelihood of reversals.
Confirming signals in an uptrend
In this EUR/USD daily chart, we see the pair in a strong uptrend through late 2021. As the rally accelerated going into early 2022, Williams’s %R peaked above its overbought threshold numerous times.
However, the indicator quickly rebounded, and the uptrend extended despite temporary overbought signals. These failures emphasise why confirmation is so important.
Finally, in February 2022, EUR/USD formed a prominent lower high as Williams’s %R diverged by making a lower high. This warned of faltering upside momentum.
As selling pressure kicked in during March, the 20 and 50-day moving averages crossed bearishly. Williams’s %R plunged below its oversold line near -80. This mix of signals gave a high conviction for a trend reversal.
Traders who acted on these aligned signals would have capitalised on the sizable downtrend over the next few months. Getting in near the former range high offered an excellent risk-to-reward scenario.
Using Williams %R in ranging markets
In periods of directionless price action, Williams %R works well for trading reversals at range extremes. Its swift oscillating nature allows timely entries compared to lagging indicators.
Let’s analyse this GBP/JPY daily chart…
Throughout mid-2022, the pair fluctuated sideways between roughly 158 support and 164 resistance. Each test of range lows sent Williams %R near oversold levels below -80.
Conversely, tests of the range highs pushed the indicator into its overbought zone. This demonstrates how Williams %R identifies stretched moves well before true reversal points.
Range-bound traders could have used these signals to buy near support and sell near resistance. Entries will be confirmed once the price starts rebounding off these areas as volume increases.
The next chart zooms in on a portion of this range-bound price action. It illustrates how Williams’s %R might be incorporated into trade reversals.
Overall, this example shows how Williams %R adapts well to non-trending markets by detecting exhaustion signals at key zones.
Advantages over other indicators
The Williams %R has distinguishing features that provide notable advantages over other popular indicators like the Relative Strength Index (RSI).
For one, Williams’s %R is more sensitive than RSI, given its 0 to -100 scale. The narrower band allows quicker turns from oversold to oversold. RSI’s wider 30 to 70 range has less sensitivity.
Additionally, while both indicators signal overbought/oversold levels, the RSI is bound between set extremes. Comparatively, Williams %R’s upper and lower thresholds fluctuate based on the asset’s unique price range. This dynamic approach improves the accuracy of extremes.
The indicator also incorporates the closing price rather than averaging like RSI and some others. This ensures signals align closely with key reversal candlesticks on the chart.
For experienced technicians, Williams %R delivers more versatility in analysing short-term price moves. Its wider population of signals empowers quicker reactions to changing conditions.
Crafting a Williams %R trading strategy
While the Williams %R is useful for confirming reversals, traders should incorporate additional analysis for a complete system.
Here are tips for crafting a trading strategy, including the Williams %R:
- Define Trend or Range Conditions: Classify the market state since reversals work best in ranges.
- Choose Other Confirming Indicators: Add something that measures trend direction, like moving averages or a channel.
- Combine With Chart Patterns: Look for reversal candlesticks, failed breakouts, and double tops/bottoms that align with Williams’s %R signals.
- Utilise Volume Clues: Spikes in volume indicate conviction behind reversals.
- Set Risk Plans: Establish stop losses and target exit points for a risk-controlled approach.
No indicator is perfect on its own. Formulating trading rules, risk management, and combining various analyses creates reliability. This allows you to leverage Williams %R’s strengths while mitigating its potential weaknesses.
Conclusion
The Williams %R’s adaptive and sensitive nature makes it applicable across assets and market environments. During trends, it helps gauge exhaustion early to profit from corrections. In ranging markets, Williams %R identifies reversal signals at extremities.
While new traders should practice patience in interpreting signals, Williams %R ultimately serves as a valuable tool for timing entries, exits, and planning risk management. By combining its overbought/oversold readings with chart patterns and other indicators, traders can craft versatile strategies.
FAQs
The Williams %R is most popular on short-term charts like 5-minute and 15-minute for its swift signals. However, it adapts to daily and weekly charts too for identifying bigger trend exhaustion moves.
Traders use Williams %R to spot patterns on charts like double tops and bottoms or breakouts. They look for high trading volume to confirm a trend reversal.
The typical Williams %R setting involves a 14-period lookback length. However, faster settings like 7 or slower ones like 20 may better fit volatile or smoother markets, respectively, based on testing.
The Williams %R is standardised to fluctuate between 0 and -100. So, if the formula outputs a positive number, it is just rounded down to 0, representing the overbought threshold. Readings will be at most 0.
Yes, traders often match Williams %R overbought or oversold signals with completing chart patterns like Head and Shoulders. The indicator helps confirm whether a pattern signals an actual reversal.