What is the Williams R Indicator?

The Williams R indicator, also known as the Williams %R, is a technical indicator within the trading spectrum. By type, it is a momentum oscillator which helps traders identify when an asset is overbought or oversold.

Back in 1960, Larry Williams created this indicator, which portrays the overbought or oversold condition within a range of 0 to -100.

As a trader, you must also have an idea of identifying entry and exit in trades, and with this indicator, you might achieve it. Read this blog to learn how it is calculated, how it works and more.

Understanding the Williams R Indicator

The Williams indicator typically indicates the position of an asset’s closing price against its highest high price within a specified look-back period. Usually, this look-back period is for 14 days.

As you already know, it comes with a range between 0 and -100, and it portrays the overbought or oversold condition using levels within the above range. If the reading from a Williams R indicator ranges between 0 and -20, it indicates that an asset is overbought.

Conversely, if the reading lies between the range of -80 and -100, it suggests that an asset might be oversold.

Furthermore, if a reading from this indicator ranges between -20 and -80, it highlights a neutral territory. In this zone, neither the buyers nor the sellers dominate, but they wait for an asset price to change its direction and make proper trades.

If you are curious how to spot it on a trading chart, you can locate it underneath the price data of a traded asset. Besides the look-back period being 14 days, adjusting it as required helps you further refine or fine-tune its potential for accuracy and might help with different trading styles and conditions of the market.

Working and Interpretation of the Williams R Indicator

In order to understand its working and interpret its readings for oversold or overbought trades. You must have an idea of its underlying formula for calculation:

The applicable formula to determine %R is (Highest High- Current Close) /(Highest High – Lowest Low) * -100.

Here, to have the readings and interpret them from this formula, you must note a few points. For an asset’s highest high, you must place the highest price your asset has reached in a given timeframe. Typically, traders use a 14-day period, but you can modify it.

For its lowest low, you must place the lowest price the asset has reached in this period. In place of ‘current close’, you must place the closing price of your chosen asset after this 14-day timeframe or a period of your choice.

Thus, from this formula, you can interpret an oversold or overbought condition of an asset after each period. Note that you must always use the previous 14 days or the exact days you chose as a look-back period.

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How is the Williams R Indicator Calculated?

Now that you know how to use the formula, and it’s working based on it, you must have a look at a detailed view of its calculation. It might be effective to trade according to the Williams R indicator strategy with a broader understanding, and for that, let’s resort to an example:

Suppose you are tracking a company’s stock trading and want to determine whether it is being overbought or oversold. Also, you set its look-back period for a traditional 14-day period.

Now, imagine in this period, this stock reached its highest high at INR 190. Conversely, its recorded lowest for this period has been INR 170. Suppose the closing price for the day when calculating is INR 175.

Let’s put the information on the above formula to determine the Williams R indicator:

%R = (INR 190 – INR 175)/(INR 190 – INR 170)* -100 = -75.

As you have already seen that a %R between -20 and -80 is considered neutral, the derived indication of -75 is still indicated as the stock residing in a neutral zone. However, being close to -80, it is close to an oversold condition.

Advantages of the Williams R Indicator

Now that you know what is Williams R indicator, its formula and calculation, you must note some of its key advantages. Noting these might help you plan trades according to a Williams R indicator strategy:

1. Flexibility of Adjusting the Look-Back Period

   If you are someone who prefers booking potential short-term profits, it can help set your look-back period accordingly. For example, you can set a look-back for 7 days. It will help generate more frequent and responsive overbought or oversold conditions. Also, as a swing or delivery trader, set it for 21 or 28 days, filter out noise and focus on multi-week trends.

2. Decide on Entry and Exit Points

   As this indicator gives an overbought signal between -20 and -80 and oversold signals at -80 to -100, traders can efficiently choose entry and exit points in the market. Choosing an efficient entry or exit point is effective to book potential gains and steer clear of possible market losses.

3. Helps with Risk Management

   Due to its capability of showing extreme market conditions via overbought and oversold signals, it helps you manage risks during trades. Typically, when this indicator produces a higher overbought or oversold figure, it means a potential reversal might be near. As a trader, you might adjust your stop-loss or reduce your position size for risk management.

4. Suitable for Different Securities

   Another important advantage of this indicator is its versatility. It means you can employ its indication or signals for different sorts of assets. Therefore, if you are trading in stocks, currencies, commodities or any other sort of asset, you can decide on overselling or overbuying signals using it.

5. Works for Different Market Conditions

   Being an indicator, apart from flexibility in terms of asset suitability, it also works with different market conditions. For example, it might generate signals when the market of an asset is going sideways. Depending on market conditions, it has the potential to generate reversal signals even before an actuarial reversal happens.

Disadvantages of the Williams R Indicator

Apart from its advantages above, you must note a few of its disadvantages that might impact your return potential while trading with the Williams R indicator strategy:

1. Needs Confirmation From Other Signals

   You must not rely solely on overbought or oversold signals from this indicator when trading. It is because this indicator might generate false signals. For example, when there is an uptrend, this indicator often hits overbought temporarily, and this is before the price rallies up. Thus, combined with trade volume spikes, you can confirm an uptrend better.

2. Provides no Price Trend Confirmation

   Trend following indicators, such as moving averages, provide price trend information, especially effective for trend-traders. However, A Williams R indicator focuses on the current position of asset prices, depending on recent highs and lows. Thus, in a volatile market for trend-traders, it might not be that suitable.

3. Sensitivity of Parameters

   The performance of this indicator depends on its settings, such as the look-back period, etc. Thus, any minor adjustments to such settings might result in drastic changes in trend signals. It becomes less reliable in terms of signal production if you calibrate it incorrectly.

Conclusion

The Williams R indicator uses a specific formula to indicate whether a certain security is being overbought or oversold. It produces these indications between a range of 0 and -100. Depending on its indications, you can decide on market entry or exit and capitalise on potential profit-making opportunities.

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FAQ’s on Williams R Indicator

1. What is the best timeframe for the Williams R indicator?

The best timeframe or usual one for this indicator is a 14-day look-back period. However, you can modify it and set it for as low as 7 days for short-term trades. For a bit of long-term trading, set it for 21 or 28 days.

2. What is the best setting for the Williams R indicator?

There is no best setting for this indicator as it depends on your trading strategy. You can follow the traditional 14-day look-back period, shorten or extend it depending on your trading requirements.

3. How can traders use the Williams %R in trading?

Traders can use the applicable formula by placing an asset’s highest high, lowest low and closing prices for a set look-back period. Depending on the outcome, they can match it with its range and decide on whether it is oversold, overbought or neutral.

4. Are Stochastic and William R Indicator the same?

No, both of these indicators are not the same in trading. Although both of them usually measure an overbought or an oversold condition, the William %R compares an asset’s closing price with its highest high for a set period. Stochastics typically compare an asset’s current price with its high and low prices over a period.