Williams %R Indicator
The Williams %R Indicator is a technical analysis tool that analyzes the price of a commodity to determine whether it is being overbought or oversold in comparison to its intrinsic value over a certain period. It is similar to a Stochastic Oscillator (a momentum indicator that uses support and resistance levels to form its analysis) but does not range from 0 to 100, it instead ranges from -100 to 0. The Williams %R Indicator, also known as the Williams Percent Range, is not only similar to the Stochastic Oscillator, it is also used as an alternative to it.
The Williams %R Indicator can be very useful for even entry-level investors in deciding when to enter and exit a commodity or security based on the current pricing of securities as compared to the “correct” price or “real” value of the security. The extreme indicators on the William %R indicator are -100, which suggests the lowest price of a commodity over ‘n’ number of days, and 0, which indicates the highest price of shares over ‘n’ number of days. Since these are the two extreme ends, the midpoint stands at -50, this is considered to be the intrinsic value of the commodity. Any fluctuation above this value means that shares are being sold higher than their intrinsic value and any fluctuation below this figure means that shares are being sold below their intrinsic value.
It is a generally accepted default for the Williams %R Indicator that readings between 0 and -20 are considered overbought (shares are being purchased in excess at a higher price and hence the market is bullish) and readings between -80 and -100 are considered oversold (shares are being sold in greater volumes at lower than intrinsic value, hence the market is bearish). The typical period associated with the Williams %R Indicator is 14 days. These values are considered defaults and are usually meant to be influenced and adapted according to the characteristics of the share itself.
It’s important to remember that an overbought indication does not mean that the share price is going to fall and correct itself and vice versa, it simply means that the price is near the highs of its recent range. The overbought and oversold state in a Williams %R Indicator may continue for a prolonged period and does not signal market direction. It specifically signals the state of the market with the selected period and can act as a signal to take action when the Williams %R Indicator moves out of the overbought or oversold territory.
Limitations of using the Williams %R Indicator
Here are a few of the limitations faced when using the Williams %R Indicator
- The Williams %R Indicator indicates the current state of the market, it does not predict the market direction of forecast potential commodity movement. Hence taking any position based solely based on the Williams %R Indicator may prove to be more damaging than advantageous.
- This indicator can prove to be overly responsive as it may give many false signals. The indicator may show a figure of -90 (oversold) which starts increasing every day, yet you may see no increase in the price itself. This is because the indicator is only looking back at the past 14 days and is unaffected by prices before that, even if the trend, in the long run, is still moving downwards or if the price hasn’t moved at all.
- The Williams %R Indicator cannot be relied on solely for technical analysis and decision making when taking a position in the market, it must be paired with other tools to maximise the opportunity of a successful market prediction.
The formula for Williams %R Indicator
To calculate the Williams %R Indicator you must:
- Calculate the highest and lowest peaks for 14 days
- On the 14th day itself, take note of the highest, lowest and current price. You will now be able to fill in all the variables in the indicator’s formula.
- On the 15th day, note the current, highest and lowest prices for the day and compute the new Williams %R indicator but only for the previous 15 days (Omit the 1st day from the previous calculation).
- At the end of each new period, compute the new Williams %R Indicator considering only the previous 15 days.
The formula itself for the Williams R indicator is:
Williams %R = (highest high (14 periods) - most recent close) / (highest high (14 periods) - lowest low (14 periods))
Frequently Asked Questions Expand All
The rule that Williams generally used when applying this indicator was Buy an oversold stock when:
- %R Reaches -100
- A period of 5 trading days has passed since -100 was last reached
- %R has risen above -95 or -85
Sell an overbought when:
- %R Reaches 0
- A period of 5 trading days has passed since 0 was last reached
- %r has fallen below -5 or -15
It is also important to note that the Williams %R Indicator comes with its own set of limitations and should not be used solely to take a position in the market, instead it should be paired with other technical tools for an accurate market prediction.
Larry Williams, an American author, stock, commodity trader and politician from Montana, USA developed the Williams %R Indicator which is a momentum indicator that is the inverse of the Fast Stochastic Oscillator.