Williams %R

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Introduction

One of the more popular indicators, Larry Williams "Williams %R" is a momentum indicator that is the inverse of the Fast Stochastic. Inverse means it measures the highest highs in it's look back period instead of stochastic's lowest lows. It's a leading indicator, meaning momentum changes direction before price - this is a general technical analysis rule.  It is used to confirm overbought and oversold signals by measuring the stocks rate of change in price.  As far as trading goes it trades just like the fast stochastic, with no real difference, except for the inverse scale.

The Stochastic measures the level of the recent close relative to the lowest lows of a look back period , the Williams reflects the level of the recent close relative to the highest high for the look-back period. %R corrects for the inversion by multiplying the raw value by -100. As a result, the Fast Stochastic Oscillator and Williams %R produce the exact same lines, only the scaling is different. Williams %R oscillates from 0 to -100. Readings from 0 to -20 are considered overbought. Readings from -80 to -100 are considered oversold. Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable to Williams %R.  It's calculated as below:

%R = (Highest High in the period- recent Close)/(Highest High in the period- Lowest Low in the period) * -100 
{%R is multiplied by -100 - correcting the inversion and moving the decimal.}

The Williams %R Settings and Sensitivity

The default setting for %R is 14 periods, which can be days, weeks, months or an intra-day timeframe. It all depends on the chart timeframe you're looking at. i.e. If you're looking at a daily chart the W%R will look back 14 days. If you've drilled down to a 5 minute chart the W%R will look back 14 x 5 minute periods, i.e. 70 minutes. A 14-period %R would use the most recent close (i.e. last periods close), the highest high over the last 14 periods and the lowest low over the last 14 periods.  In the below chart we can see the visualisation of the formula, looking back 14-periods (in this case weeks).  

The default period can be changed. If you choose a shorter period than 14, say 5, the oscillator will be more volatile. It will react more quickly to momentum change and if you increase the period to 20, the W%R will react more slowly to momentum change. Both have their uses. A more reactionary W%R will catch momentum changes more quickly, but will create many false signals and a slower W%R will be more robust, but will be slow at catching the momentum change. You're trading style will determine which period to pick. 

Larry Williams indicates that maximum success from using %R (Percent R) comes from knowing (estimating) the current dominant cycle, then using 1/2 that time frame for Percent R. If the dominant cycle for Gold has been 18 days, use a 9 day Percent R. You can arrive at that by counting the days from peak to peak and low to low to get the approximate time span usually seen.

Reading The Chart

As we can see from the below EUR/USD weekly chart the momentum in price movements is represented below by the %R momentum oscillator. It oscillates between 0 and -100, where 0 to -20 is overbought and -100 to -80 is oversold.  A Williams %R cross above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that momentum is with the bulls. Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period. This suggests that momentum is with the bears.  If we overlaid a fast stochastic on our chart, it would look exactly the same as the %R, only on a scale of 0 to 100.  

EUR/USD - Williams %R

Overbought and Oversold Signals

The Williams %R is said to be overbought when if falls within the 0 to -20 band and oversold as when it falls into the -80 to -100 band.  These -20 and -80 lines act as signals to sell and buy respectively, although some traders will use different parameters depending on the market, trend, time frame etc... For instance smaller look back periods will be more volatile than larger ones and maybe more useful if the market cycles are smaller.  Also, the overbought/sold signals may be set at -10/-90, or -25/-75.  Experimentation within your trading set up will allow you to find your optimal levels.  For now though, it's perhaps a good idea to stick to the universally default parameters. This is similar to our stochastic section.

Just be aware of how this indicator acts when the market is trending or ranging. In a down trend the %R can stay oversold for long periods and vice-versa in the up trend.  In our above EUR/USD chart it's clear that overbought levels are more prominent and more rounded in shape, than the quick in/out oversold levels. This is typical of a good up trend.

Trend Trading Williams %R with Overbought/Sold Signals

There are different ways to trade the W%R, which vary depending on whether we're trending or range bound. In all cases though it's wise to wait for momentum change confirmation prior to trading (explained below).  Williams originally advocated the following trading rules in the early 1970's for his W%R: 

Buy when 
  1. %R reaches 100%, then...
  2. five trading days have passed since 100% was last reached, then...
  3. after which the %R again falls below 85/95%. 
Sell when 
  1. %R reaches 0%
  2. five trading days have passed since 0% was last reached
  3. after which the Williams %R again rises to about 15/5%.
Williams has amended his rules as you can find out from his web site https://williamspercentr.com/trading-with-percent-r.  Below we'll look at the main factors.

Gold - Williams' Own Trading Startegy

Williams %R Today - His own strategy: a continuation of momentum strategy
  • Choose W%R parameters, in this case W%R (20) (see "The Williams %R Settings" above)
  • Overbought/sold levels are -75 and -25
  • Trade with the trend - In this case 50-period SMA indicates up trend - so Buy, don't short
  • Enter trade when %R breaks above it's current trend, indicated by red trend line.  The break is the confirmation momentum has turned back to the previous trend
  • Stop/Loss just below the low of the entry day (all you loose is a days range)
  • Trailing stop placed under the last periods low - ONLY once %R crosses overbought (as it crosses -75)
  • Exit when the trend falls into retracement/reversal (when the w%r breaks trend again).
{notice how Williams trades even though W%R hasn't crossed in to oversold levels in his new strategy.}

You may want to follow Williams own rules, or build your own from the general trading rules as discussed below.  Because the W%R is built from raw data some smoothing may be required prior to acting on signals, this can be done by increasing the look back period (14 or above) or adding a moving average to the indicator.  In our examples below we'll continue using W%R (14) and include a 5-period SMA (of the W%R) for comparison.  In trend trading, signals should only be taken when there is clear evidence that the trend has continued - this filters out many bad signals. One method of doing so is to wait until %R crosses the -50 level, so:
  • Go long when %R exits Oversold levels then rises above -50.
  • Go short when %R exits Overbought levels then falls below -50.
In the S&P500 chart below we can see how a general trend trade will look.  Here we'll look at using the Williams %R and it's moving average with the signal line.

S&P 500 - Signal Trend Trade

Williams %R Trend General Trade (Up Trend):
  • General Parameters: set to a 14-period W%R on a daily chart
  • Buy trigger - Enter the trade long (buy) when W%R (or it's moving average) crosses above -80 then confirmed when it crosses -50 (A).  (Some traders will use the W%R moving average instead of the W%R for trading, this just smooths things out - reducing false signals, but getting in later).
  • Some traders may wait for a divergence prior to entry (see below section)
  • Sell Trigger - When you've met your reward to risk ratio (see below), when w%r crosses back below -50, or use a trending indicator to exit. In our example we're exiting when price drops below a 50-day SMA, which has acted as support. Our Exit would have been at (B). Some traders may use a trending indicator like ATR and pin point an exact trade exit level.
  • Our stop/loss is placed just below strong support at (C). In this case just above 50-day SMA
  • Set up a trailing stop just under the trend support line (in this case just below the 50-day SMA)
  • Risk Reward Ratio: Generally traders look for between 1:1 and 3:1. Calculate the loss you can take (generally no more than 2% of your total portfolio) and decide whether potential profit and stop/loss fit into this trading strategy. In this case it's wise to wait until the trend retraces to the support line prior to trading (as per or example).
  • The Opposite applies for shorting a trade - i.e. short on the -20 then it's -50 confirmation - only in a down trend
These are just general rules.  For example some will have overbought/sold levels at -25/-75 and some traders will await some other kind of confirmation. Others will await Divergences and failure swings prior to trading.  We'll talk about this below.

It is important to note that when stock market indicators are in oversold territory it does not necessarily means it's time to buy, and overbought signals do not necessarily mean it's time to sell. 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 always wait for a confirmation that a price reversal/retracement has indeed occurred. And remember, always go with the trend.

Divergence & Convergence Signals

Trading in a trend is always more profitable. However, whether in a trend or range, divergences and convergences between price and oscillators identify the best trading opportunities. Williams %R is no exception.

Below is a 1hr price chart of the EUR/USD with Williams %R set at 14 showing bearish divergence, with price on the right and a convergence on the left.

EUR/USD - W%R Divergence & Convergence

The A-B line indicates price declining and the C-D line indicates the Williams %R showing a bullish convergence. Although price is still declining, the momentum to the down side is waning and could possibly reverse. You would look for opportunities to go long in this situation and trade as in one of the above examples.

Conversely, the E-F line indicates the price advancing and the G-H line indicates the Williams %R showing a bearish divergence. This indicates price momentum increasing at a slower pace and a turn may be on the cards as bears increase their activity.  You would look for opportunities to short here.

These divergences and convergences are stronger if they happen in overbought and oversold areas.  As the W%R crosses out of these areas then trading opportunities occur, but remember reversal confirmation is needed. This is a particularly strong signal in trends.  The divergence/converence may signal an end to a retracement of the trend, prior to the trend continuing.

Signal Failure Swings - Signalling a Momentum Shift

If a market is trending we will consistently see the W%R in overbought and oversold areas, while the opposite area will be sparsely populated.  For instance, if we are trended down we will see W%R in oversold territory a lot.  If W%R then swings up to overbought, but can't swing all the way back to oversold, then may show that bearish momentum hasn't returned to the same extent and a possible price reversal may happen.  This is called a failure swing.  We can see this play out in the below chart

TJX - Failure Swing and it's Signal

In the above chart after the oversold areas in Dec 2009 there was a overbought position in Jan 2010.  This Jan overbought position coincides with a break in the down trend, as highlighted by the red dotted line.  This is a sign in itself that the trend resistance has been broken and a possible reversal could be on the cards.  There's a subsequent failure swing at the end of Jan, where the W%R fails to return to oversold levels and swings back to overbought in Feb.  Trade long entry here is signalled when W%R crosses back above -50  - our confirmation signal. If nothing else, this can be a good indicator that Trend is about to reverse.

To Sum Up

Williams developed the indicator to indicate when ranges were at their margins, but he's gone on to develop it to be a useful trend trading indicator. As you have read there are many ways to use the Williams %R.  All have fairly similar plots, based on oversold and overbought signals and a confirmation. The Williams %R is a standard component on any basic technical chart, where the Williams %R focuses on the momentum underlying the security and is a great secondary measure to be used by traders. It is important to note that the Williams %R is used in conjunction with other indicators and chart patterns, when setting up trades to gain further trading confirmation.

As we've seen, we can set the indicator's sensitivity. The sensitivity of the indicator determines how quickly the trader enters the move and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late.  Longer-term trader will use a larger period Williams %R. With high sensitivity you are more likely to catch the move into the trade, but you may generate false trading signals. For instance a swing trader (trading with a horizon of 4 to 5 days) may set the parameters to a 5-period W%R once they've drill down to an hourly chart from a daily chart. Good charting software will allow the parameters to be changed. 

Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.


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Introduction

One of the more popular indicators, Larry Williams "Williams %R" is a momentum indicator that is the inverse of the Fast Stochastic. Inverse means it measures the highest highs in it's look back period instead of stochastic's lowest lows. It's a leading indicator, meaning momentum changes direction before price - this is a general technical analysis rule.  It is used to confirm overbought and oversold signals by measuring the stocks rate of change in price.  As far as trading goes it trades just like the fast stochastic, with no real difference, except for the inverse scale.

The Stochastic measures the level of the recent close relative to the lowest lows of a look back period , the Williams reflects the level of the recent close relative to the highest high for the look-back period. %R corrects for the inversion by multiplying the raw value by -100. As a result, the Fast Stochastic Oscillator and Williams %R produce the exact same lines, only the scaling is different. Williams %R oscillates from 0 to -100. Readings from 0 to -20 are considered overbought. Readings from -80 to -100 are considered oversold. Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable to Williams %R.  It's calculated as below:

%R = (Highest High in the period- recent Close)/(Highest High in the period- Lowest Low in the period) * -100 
{%R is multiplied by -100 - correcting the inversion and moving the decimal.}

The Williams %R Settings and Sensitivity

The default setting for %R is 14 periods, which can be days, weeks, months or an intra-day timeframe. It all depends on the chart timeframe you're looking at. i.e. If you're looking at a daily chart the W%R will look back 14 days. If you've drilled down to a 5 minute chart the W%R will look back 14 x 5 minute periods, i.e. 70 minutes. A 14-period %R would use the most recent close (i.e. last periods close), the highest high over the last 14 periods and the lowest low over the last 14 periods.  In the below chart we can see the visualisation of the formula, looking back 14-periods (in this case weeks).  

The default period can be changed. If you choose a shorter period than 14, say 5, the oscillator will be more volatile. It will react more quickly to momentum change and if you increase the period to 20, the W%R will react more slowly to momentum change. Both have their uses. A more reactionary W%R will catch momentum changes more quickly, but will create many false signals and a slower W%R will be more robust, but will be slow at catching the momentum change. You're trading style will determine which period to pick. 

Larry Williams indicates that maximum success from using %R (Percent R) comes from knowing (estimating) the current dominant cycle, then using 1/2 that time frame for Percent R. If the dominant cycle for Gold has been 18 days, use a 9 day Percent R. You can arrive at that by counting the days from peak to peak and low to low to get the approximate time span usually seen.

Reading The Chart

As we can see from the below EUR/USD weekly chart the momentum in price movements is represented below by the %R momentum oscillator. It oscillates between 0 and -100, where 0 to -20 is overbought and -100 to -80 is oversold.  A Williams %R cross above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that momentum is with the bulls. Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period. This suggests that momentum is with the bears.  If we overlaid a fast stochastic on our chart, it would look exactly the same as the %R, only on a scale of 0 to 100.  

EUR/USD - Williams %R

Overbought and Oversold Signals

The Williams %R is said to be overbought when if falls within the 0 to -20 band and oversold as when it falls into the -80 to -100 band.  These -20 and -80 lines act as signals to sell and buy respectively, although some traders will use different parameters depending on the market, trend, time frame etc... For instance smaller look back periods will be more volatile than larger ones and maybe more useful if the market cycles are smaller.  Also, the overbought/sold signals may be set at -10/-90, or -25/-75.  Experimentation within your trading set up will allow you to find your optimal levels.  For now though, it's perhaps a good idea to stick to the universally default parameters. This is similar to our stochastic section.

Just be aware of how this indicator acts when the market is trending or ranging. In a down trend the %R can stay oversold for long periods and vice-versa in the up trend.  In our above EUR/USD chart it's clear that overbought levels are more prominent and more rounded in shape, than the quick in/out oversold levels. This is typical of a good up trend.

Trend Trading Williams %R with Overbought/Sold Signals

There are different ways to trade the W%R, which vary depending on whether we're trending or range bound. In all cases though it's wise to wait for momentum change confirmation prior to trading (explained below).  Williams originally advocated the following trading rules in the early 1970's for his W%R: 

Buy when 
  1. %R reaches 100%, then...
  2. five trading days have passed since 100% was last reached, then...
  3. after which the %R again falls below 85/95%. 
Sell when 
  1. %R reaches 0%
  2. five trading days have passed since 0% was last reached
  3. after which the Williams %R again rises to about 15/5%.
Williams has amended his rules as you can find out from his web site http://williamspercentr.com/trading-with-percent-r.  Below we'll look at the main factors.

Gold - Williams' Own Trading Startegy

Williams %R Today - His own strategy: a continuation of momentum strategy
  • Choose W%R parameters, in this case W%R (20) (see "The Williams %R Settings" above)
  • Overbought/sold levels are -75 and -25
  • Trade with the trend - In this case 50-period SMA indicates up trend - so Buy, don't short
  • Enter trade when %R breaks above it's current trend, indicated by red trend line.  The break is the confirmation momentum has turned back to the previous trend
  • Stop/Loss just below the low of the entry day (all you loose is a days range)
  • Trailing stop placed under the last periods low - ONLY once %R crosses overbought (as it crosses -75)
  • Exit when the trend falls into retracement/reversal (when the w%r breaks trend again).
{notice how Williams trades even though W%R hasn't crossed in to oversold levels in his new strategy.}

You may want to follow Williams own rules, or build your own from the general trading rules as discussed below.  Because the W%R is built from raw data some smoothing may be required prior to acting on signals, this can be done by increasing the look back period (14 or above) or adding a moving average to the indicator.  In our examples below we'll continue using W%R (14) and include a 5-period SMA (of the W%R) for comparison.  In trend trading, signals should only be taken when there is clear evidence that the trend has continued - this filters out many bad signals. One method of doing so is to wait until %R crosses the -50 level, so:
  • Go long when %R exits Oversold levels then rises above -50.
  • Go short when %R exits Overbought levels then falls below -50.
In the S&P500 chart below we can see how a general trend trade will look.  Here we'll look at using the Williams %R and it's moving average with the signal line.

S&P 500 - Signal Trend Trade

Williams %R Trend General Trade (Up Trend):
  • General Parameters: set to a 14-period W%R on a daily chart
  • Buy trigger - Enter the trade long (buy) when W%R (or it's moving average) crosses above -80 then confirmed when it crosses -50 (A).  (Some traders will use the W%R moving average instead of the W%R for trading, this just smooths things out - reducing false signals, but getting in later).
  • Some traders may wait for a divergence prior to entry (see below section)
  • Sell Trigger - When you've met your reward to risk ratio (see below), when w%r crosses back below -50, or use a trending indicator to exit. In our example we're exiting when price drops below a 50-day SMA, which has acted as support. Our Exit would have been at (B). Some traders may use a trending indicator like ATR and pin point an exact trade exit level.
  • Our stop/loss is placed just below strong support at (C). In this case just above 50-day SMA
  • Set up a trailing stop just under the trend support line (in this case just below the 50-day SMA)
  • Risk Reward Ratio: Generally traders look for between 1:1 and 3:1. Calculate the loss you can take (generally no more than 2% of your total portfolio) and decide whether potential profit and stop/loss fit into this trading strategy. In this case it's wise to wait until the trend retraces to the support line prior to trading (as per or example).
  • The Opposite applies for shorting a trade - i.e. short on the -20 then it's -50 confirmation - only in a down trend
These are just general rules.  For example some will have overbought/sold levels at -25/-75 and some traders will await some other kind of confirmation. Others will await Divergences and failure swings prior to trading.  We'll talk about this below.

It is important to note that when stock market indicators are in oversold territory it does not necessarily means it's time to buy, and overbought signals do not necessarily mean it's time to sell. 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 always wait for a confirmation that a price reversal/retracement has indeed occurred. And remember, always go with the trend.

Divergence & Convergence Signals

Trading in a trend is always more profitable. However, whether in a trend or range, divergences and convergences between price and oscillators identify the best trading opportunities. Williams %R is no exception.

Below is a 1hr price chart of the EUR/USD with Williams %R set at 14 showing bearish divergence, with price on the right and a convergence on the left.

EUR/USD - W%R Divergence & Convergence

The A-B line indicates price declining and the C-D line indicates the Williams %R showing a bullish convergence. Although price is still declining, the momentum to the down side is waning and could possibly reverse. You would look for opportunities to go long in this situation and trade as in one of the above examples.

Conversely, the E-F line indicates the price advancing and the G-H line indicates the Williams %R showing a bearish divergence. This indicates price momentum increasing at a slower pace and a turn may be on the cards as bears increase their activity.  You would look for opportunities to short here.

These divergences and convergences are stronger if they happen in overbought and oversold areas.  As the W%R crosses out of these areas then trading opportunities occur, but remember reversal confirmation is needed. This is a particularly strong signal in trends.  The divergence/converence may signal an end to a retracement of the trend, prior to the trend continuing.

Signal Failure Swings - Signalling a Momentum Shift

If a market is trending we will consistently see the W%R in overbought and oversold areas, while the opposite area will be sparsely populated.  For instance, if we are trended down we will see W%R in oversold territory a lot.  If W%R then swings up to overbought, but can't swing all the way back to oversold, then may show that bearish momentum hasn't returned to the same extent and a possible price reversal may happen.  This is called a failure swing.  We can see this play out in the below chart

TJX - Failure Swing and it's Signal

In the above chart after the oversold areas in Dec 2009 there was a overbought position in Jan 2010.  This Jan overbought position coincides with a break in the down trend, as highlighted by the red dotted line.  This is a sign in itself that the trend resistance has been broken and a possible reversal could be on the cards.  There's a subsequent failure swing at the end of Jan, where the W%R fails to return to oversold levels and swings back to overbought in Feb.  Trade long entry here is signalled when W%R crosses back above -50  - our confirmation signal. If nothing else, this can be a good indicator that Trend is about to reverse.

To Sum Up

Williams developed the indicator to indicate when ranges were at their margins, but he's gone on to develop it to be a useful trend trading indicator. As you have read there are many ways to use the Williams %R.  All have fairly similar plots, based on oversold and overbought signals and a confirmation. The Williams %R is a standard component on any basic technical chart, where the Williams %R focuses on the momentum underlying the security and is a great secondary measure to be used by traders. It is important to note that the Williams %R is used in conjunction with other indicators and chart patterns, when setting up trades to gain further trading confirmation.

As we've seen, we can set the indicator's sensitivity. The sensitivity of the indicator determines how quickly the trader enters the move and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late.  Longer-term trader will use a larger period Williams %R. With high sensitivity you are more likely to catch the move into the trade, but you may generate false trading signals. For instance a swing trader (trading with a horizon of 4 to 5 days) may set the parameters to a 5-period W%R once they've drill down to an hourly chart from a daily chart. Good charting software will allow the parameters to be changed. 

Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.


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