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William's % R

Williams %R has proven very useful for anticipating market reversals.

Overview

  • Williams %R is a momentum indicator
  • identifies overbought or oversold markets.
  • It is plotted on an inverted 0 to 100 scale.

This oscillator, a version of the stochastics oscillator, was developed by Larry Williams.

In the example above a strongly uptrending market it shown with the Williams %R indicator plotted below. The primary buy signals are shown in red. More cautious investors wait for the %R to form a definite low below 90% and then bounce back through this level before acting on the buy signals.

Interpretation

Mr. Williams indicates that the essence of his trading system is based on interpreting readings of %R. He states that, "Generally speaking, readings below 95% give a buy indication - during bull markets. A reading above 10% gives a sell signal during bear markets." He goes on to say that "the %R index will not work if you insist on acting on the buy signals during a bear market." He emphasizes strongly the need to isolate the dominant trend - whether it is a bull or bear trend. Then he tracks price movements with %R and waits for the signals. (See his book, "How I made One Million Dollars... Last Year... Trading Commodities" by Larry R. Williams.)

To determine the long term trend for commodity or futures markets, Mr. Williams advocates the use of a 10-week moving average. The indicator is now popular in most markets and has proven itself useful with stocks.

Like other momentum indicators, Williams %R is not very useful in a sideways market, or trading range. The market needs to be trending up or down for the signals to be reliable.

Signals

Mr. Williams bases his system largely on the use of the following two signals (once again notice that the signal is reliant on the direction of the underlying long-term trend):

  • Buy when %R hits 90% to 100% and the trend is up.
  • Sell when %R hits 10% to 0% and the trend is down.

Some traders use readings below 80% to indicate oversold markets and readings above 20% to indicate overbought markets. These levels can also be used as early warning signals.

In a blow-off market, where prices have undergone a very steep rise, Mr. Williams suggests waiting before responding to %R. For example, he suggests acting on buy signals (assuming the long term trend is up) only after:

    1. %R has hit 100%,

    2. Five trading days have passed since the 100% reading was hit, and

    3. %R again falls below 95%.

Mr. Williams assures us that not all signals will be correct; there are no perfect indices. "Yet," he continues, "%R remains the best timing tool I have ever used for determining overbought and oversold markets."

Williams %R has proven very useful in anticipating market reversals. The indicator almost always forms a peak and turns down a few days before the price peaks and turns down. And vice versa for bottoming markets.