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Williams R indicator: Definition, Formula & Trading Strategy

Definition

The Williams R indicator is a momentum oscillator that tells the closing price level relative to the lowest and highest price for the period. it is also called as williams percentage range indicator.

Developed by Larry William oscillates between 0 and -100 and identifies the overbought and oversold levels. The reading of -80 suggests oversold, while the reading of -20 mentions the overbought level.

The -50 level is the midpoint; whenever the price goes above or below the level, it indicates a stronger trend.

williams r indicator

Formula

The formula for the Williams %R is 

%R = (Highest High – Close) / (Highest High – Lowest Low)

Where;

Highest High = Highest price of the period.

Close = Most recent closing price.

Lowest Low = Lowest price of the period.

Calculations

To calculate the Williams %R Oscillator, you must follow specific steps. 

First, you need to have a look back, period. The default period Larry used was 14. It suggests that they will look at the highest and lowest low of the past 14 periods.

After the 14 periods close, you must calculate the current and lowest/highest prices.

Best settings for the Williams R indicator 

The best settings for the indicator are 

Input ParametersValues
TimeframeChart
Length14
SourceClosing price
indicator settings
williams r indicator settings

The default length for the oscillator is 14. As mentioned earlier, Williams %R tells about the closing price relative to the previous period’s highest high and lowest low. So, if you choose a value higher than 14, the oscillator produces more accurate results.

As with the other oscillators, you need to select a higher timeframe when applying the %R to filter any false signals.

How to trade with the Williams %R indicator?  

There are two ways to trade with the indicator; finding the overbought and oversold level and moves above or below the -50.

Williams %R, being a bound oscillator, makes it simple to spot overbought and oversold levels. The oscillator ranges from 0 to -100 and will always move within this range, regardless of how fast the price goes up or down.

When the indicator is close to -80, it suggests an oversold condition. Here, you can take short positions or exit long ones. Conversely, when the oscillator is close to -20, it identifies an overbought level, and you can take buy positions or exit short positions.

buy and sell signal

The other way to trade with the indicator is to track the movement above or below the -50. When the oscillator goes above -50, it suggests the start of an uptrend, and below -50 mentions the start of a downtrend.

The chart above shows that when the %R dipped below -50, it drifted downwards, presenting a short entry point.

trading william r indicator

When trading with the indicator, you need to remember a few things. Overbought and oversold levels on the indicator do not guarantee the prices will reverse. 

For example, the indicator may be in the overbought zone and begin to drop while the price does not. This is because the indicator only considers the last 14 periods and will only measure the highs and lows of the 14 periods.

You also need to watch for momentum failures. For instance, the price frequently reaches -20 or higher during a strong uptrend. If the indicator falls and then fails to rise above -20 before dropping again, it indicates that the uptrend is about to end.

Advantages

  • The indicator is relatively easy to use.
  • It is a range-bound oscillator that helps determine trend direction.
  • You can use the %R and other indicators for further signal confirmation. 

William R indicator vs. Stochastics

Stochastics and williams R indicator are range-bound and oscillate between 0 and -100. However, there are differences between the two.

Firstly, they use different calculations. AO uses the SMA for its calculation, whereas MACD uses two EMAs.

Secondly, %R has only one line, whereas Stochastics has two lines, %K and %D. 

williams r vs stochastics

Summary 

The William %R is a momentum oscillator that calculates closing prices relative to the highs and lows of previous periods. In doing so, the oscillator mentions the overbought and oversold levels.

You can also use take positions at the midpoint. Whenever the indicator goes above or below the -50, it confirms the stronger trend.

For further signal confirmation, you can use the oscillator and other momentum oscillators like the MACD or Stochastics.


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