Williams PctR

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Introduction

In his quest to find successful trading strategies, renowned futures author and trader Larry Williams developed the Williams %R indicator, which he discussed in his book “How I made a 1,000,000 last year trading commodities”. The Williams %R is a momentum based indicator that is designed to identify overbought and oversold market conditions.

Calculations

The %R formula measures the current closing price of stock in relation to the high and low of the stock in the past N days (for a given N). The %R indicator will help investors or traders determine whether a stock is trading near the high or the low of a selected trading range. Williams typically used 14 trading days in his calculation of the %R. You can change the time period that so that value of N days matches your trading time frame. The shorter period of N the more signals the indicator will produce and a more volatile indicator will be. Conversely the longer the period for N, the fewer signals the indicator will produce and less sensitive it will be. Mathematically the %R behaves the same the stochastic %K indicator.

Interpretation

Williams designed the oscillator on a negative scale, from lowest being -100 up to highest reading of 0. This may seem strange to traders who are already familiar with the many of the other momentum indicators that are built on the opposite scale of 0 to 100. The %R value of -100 represents the closing price today that is the lowest low of the past N days, and a reading 0 is a close today that is the highest high of the past N days. Readings below -80 are regarded as oversold conditions and readings above -20 are overbought conditions.

One of the advantages of using the Williams % R indicator is that it is very easy to identify buy and sell signals. Buy Signals are triggered when the %R moves above the -80 level on the oscillator.

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Trend Confirmation

Many traders use the -50 centerline as simple to tool to identify bullish or bearish market conditions. Readings above -50 are considered to be bullish and traders should look only to trade from the long side. Conversely a reading below the centerline indicates a bearish market and traders should only look to trade from the short side. Taking this theme a bit further, a consistent reading above -20 for extended time periods are readings of a strong up trending market while consistent reading below-80 are readings of a strong down trending market. In these market conditions traders are advised not to trade against the trend but to look for opportunities to trade in the direction of the trend. Only when the price action of the market indicates that direction of the market is about to change (failure to make a new high or low), should you consider trading against the current trend. Traders can then use to the Williams %R to confirm what the price action of the market is signaling to them and either look to exit or reverse their positions.

Conclusion

The Williams %R is a momentum oscillator that measures the recent strength or weakness of the market by examining where the recent close of the market is relative to range of the market for specific time period. %R can also be used by traders to identify intermediate direction of the market. Where %R values above -50 indicate bullish market conditions and %R values below -50 indicate bearish market conditions. As with the majority of all technical indicators, trader can increase their probability of success if they use the Williams %R in addition to other indicators.