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The Williams’ %R (usually called the Williams Percent Range or Williams Overbought/Oversold Index) is a simple, yet effective technical analysis tool that excels at determining overbought and oversold levels. This indicator would work perfectly on intraday, daily, weekly and monthly time intervals. Being an oscillator, it moves from 0 to -100 and is very close to the Stochastic in the way it works. In order to use %R effectively, you will have to understand how it works, what it is capable of and what are its limitations.

How it works?

Williams’ %R is an oscillator-type indicator, that is quite similar in its nature to the Stochastic Oscillator with the only difference being their scales. The Williams Percent Range uses a 0 to -100 scale, while for the Stochastic the readings vary from 0 to 100. The Stochastic can also boast a moving average, used as a source of crossover signals.

Williams’ %R compares the current price to the prices over the look back period

The period, that is used by %R by default, is 14 candles. The indicator will, therefore, cover the period of 14 hours for a 1H graph, and 14 weeks for a 7D graph. However, it can be changed to increase the sensitivity of the instrument (alternatively, to lower the number of false signals). The indicator shows how the current price compares to the highest price over a set period of time.

Now, to the indicator’s reading. When they get close 0, it means that the current price is getting close (or above) to the highest price, observed during the selected period. When the opposite is true, and the indicator gets to the -100 threshold, the current price is lower than the lowest price of the respective period. Finally, when the readings gravitate to the middle of the channel, the current price is equal to the average price of the look back period.

How to apply?

There are several ways to put Williams’ %R to work. This indicator is most commonly used to determine overbought/oversold levels, provide momentum confirmations and trade signals.

Overbought/oversold

When the indicator is above -20, the asset is considered to be overbought. When it falls below -80, the asset is oversold. The good thing is the indicator will use both readings as by default. You, therefore, don’t have to adjust the settings before putting the indicator into action. Don’t let the seeming simplicity of this tool fool you: overbought doesn’t not always mean the price is about to go down, just as oversold doesn’t necessarily mean that the price action will go through the roof.

Overbought/oversold levels can come in handy when determining optimal entry points

Of course, all trends are destined to reverse. Yet, overbought/oversold levels don’t tell you when to expect the reversal. Suchlike signals can be used to confirm readings, received from other indicators. Beware of false and late signals, however, as they are quite common when trading with a single indicator and no confirmations.

Momentum confirmations

In trading, momentum is just as important as the direction of the trend. A strong momentum would mean the trend is destined to last some more. Adversely, when the momentum becomes weaker, the trend runs out of its strength and can be expected to stagnate or even reverse. This kind of information is of great use to any trader.

Imagine you have spotted a newborn bullish trend. Should the %R reach -20 and stay above it, the current trend will probably last. If the opposite is true and %R stay below, the trend might be running out of steam and can, therefore, be expected to reverse. The same applies to the negative trends. When the indicator is below -80, the trend is stronger and can be expected to last. When it gets above the -80 threshold, the reversal is possible.

For two times in a row the positive trend runs out of momentum before %R could get to the overbought level

Possible limitations

As most other indicators, Williams’ %R should not be used on its own, as it will provide a lot of false and late signals. When working with the Williams Percent Range, some traders get out of the trend too early, losing a substantial portion of potential profit. It is, therefore, possible to keep the position open as long as the price is getting overall higher (lower for short positions), disregarding the signals provided by Williams’ %R. It is important to remember that it is still a trading tool, not a ready-to-use strategy.

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NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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