Using Williams 'Percent R' To Trade Stocks

Williams %R Indicator as a Powerful Technical Analysis Oscillator

May 10, 2009

Spotting overbought and oversold stocks is made simple with Larry Williams %R Indicator. Plus, the tool can be easily incorporated into a trading system.

Developed by trader Larry Williams, the Williams %R is an indicator that works much like a stochastic oscillator, yet also offers characteristics of momentum indicators. It's a simple tool and easy to interpret, and can also be very reliable in terms of trading accuracy.

Williams %R, often just referred to as %R, shows the relationship of stock's closing price in relation to the high-low range over a specific period of time. Usually, the indicator is plotted on a scale ranging from 0 to -100, with 0 being at the top of the scale, and -100 being at the bottom. Sometimes, however, charting software will plot the indicator from a low level of 0 to a high reading of 100. For the purposes of this explanation, a scale of 0 to -100 is used.

Generally speaking, readings above -20 are considered overbought, and readings below -80 are considered oversold. However, a trader may apply his or her own thresholds to determine what constitutes 'overbought' or 'oversold'. Also, adjusting the length of the %R line may cause the indicator to become oversold or overbought at a different pace (see below for more details).

How To Use Williams %R

As time moves on from left to right on a chart, the value of the %R indicator will change. Thus, it can move into overbought or oversold territory under certain conditions... particularly, during strong and longer-lasting upward or downward moves. Strong trends tend to falter and reverse eventually though; the %R line can spot points in time when those reversals are likely.

The basic idea is- as it sounds- an oversold stock or index is a bullish opportunity, while an overbought stock or index is a bearish opportunity. That superficial interpretation, however, could leave a trade disappointed in the tool's effectiveness. There are several ways to turn the technical analysis indicator into a signal-giving tool, but not all of them work consistently well.

The most common pitfall in using %R is assuming an overbought stock will immediately move lower, and that an oversold stock will immediately move higher. Both assumptions are wrong, frequently. Charts can stay overbought or oversold for very long periods of time.

The easiest way to combat that challenge is simply to wait for a stock to begin coming out of an overbought or oversold condition before taking a trade. By waiting, a trader has insured the reversal of a trend has likely started.

Another possible ways to successfully 'systemize' Williams %R is to apply a moving average to it...wait for the indicator to cross above or below its own moving average to act as a bullish or bearish signal, respectively.

%R Indicator Formula

As with any technical analysis indicator formula, it is not entirely necessary to know how the figure is calculated to be able to use the tool successfully. Nevertheless, it's always a good idea for a trader to understand how an indicator is plotted.

%R = [(highest high over 'x' periods - close)/(highest high over 'x' periods - lowest low over 'x' periods)] * -100

The larger the 'x' value (the longer the time frame being considered), the slower the %R line moves. This may make the tool lag, but it will also prevent a large number of fake-out signals. A smaller 'x' value makes the indicator more responsive, but also means it's prone to a greater number of fake-out signals.

Experiment with different overbought and oversold thresholds. Also, experiment with different %R time frame length (the 'x' in the formula above). The default settings of a charting platform are typically unhelpful.

Also, try using Williams %R in conjunction with other technical analysis indictors.