How To Use William’s %R To Make Better Trades

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.

Bullish Signals

  • 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.

Bearish Signals

  • 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.

Happy Trading!

Tara