One of the popular technical analysis oscillators used by day traders is William’s %R. Known as %R for short, this indicator is used for identifying overbought/oversold levels, recognizing trade signals, and for confirmations. Let’s see how %R can be used for picking strategic trades.
What is William’s %R Indicator?
William’s %R is basically an oscillator developed by Larry Williams. It swings between 0 and -100. This means that -50 is the midpoint. William’s %R basically shows how the current price compares to the highest price over a specific look-back period (usually 14).
- Near Zero: When the price is trading close to or above the highest high during the 14-period, the indicator is shown near zero.
- Near -100: When the price is trading close to or below the lowest low during the 14- period, the indicator is shown near -100.
- Above -50: When the price is trading within the upper portion of the 14- period, the indicator is shown above -50.
- Below -50: When the price is trading in the lower portion of the 14- period, the indicator is shown below -50.
The figure below shows William’s %R indicator.
However, this indicator is also prone to giving false signals due to frequent moves between overbought and oversold levels. So, many times, William’s %R is used in conjunction with other indicators, price analysis, or trend analysis to avoid false signals.
William’s %R and Overbought/Oversold
William’s %R can be used to identify if the stock is Overbought/Oversold.
- Overbought: When the indicator is above -20, the stock is said to be overbought. This means that the price is trading near the top of the 14-period range.
- Oversold: When the indicator is below -80, the stock is said to be oversold. This means that the price is trading near the bottom of the 14-period range.
William’s %R and Confirmations/ Reversals
William’s %R can be used for momentum confirmations and failures.
- Trend Strength Confirmation: Whenever %R continually moves above -20 during an uptrend, or continually moves below -80 during a downtrend, it indicates trend strength of that upmove/ downmove.
- Reversals: During an uptrend, whenever it is oversold (above -20), but can’t rally back again, it indicates that the upside momentum has slowed down and can potentially reverse. Similarly, if it reaches overbought (below -80) and then cannot drop back below -80, it indicates that the downtrend could be potentially reversing.
How Traders Use William’s %R Indicator For Making Better Trades
Following are the various bullish and bearish signals of William’s %R used by traders.
- During an uptrend, if the indicator was below -80 (oversold) and then rallies above -50, traders take long positions.
- If the William %R crosses above the central line (-50), it is used as a bullish signal.
- If there is a bullish divergence (i.e, the price is making lower lows and the William %R is making higher highs in oversold condition), traders take long positions.
- During a downtrend, if the indicator was above -20 (overbought) and then falls below -50, traders take short positions.
- If the William %R crosses below the central line (-50), it is used as a bearish signal.
- If there is a bearish divergence (i.e, when the price is making higher highs and the William %R is making lower lows in overbought condition), traders take short positions.
The figure below shows how to use William’s %R for choosing trades using central line cross.
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