Williams % R: A Momentum Oscillator that ranges between 0 and -100, being defined as overbought and oversold levels, respectively.
The number of periods used can be varied to suit the asset being analysed, so assets with different volatilities might need adjustments to that number of periods.
It compares the closing price of the asset to the high-low range over the period being used for the indicator.
The longer the lookback period the lower the number of false signals that are generated.
History Of Williams % R
Developed by newsletter writer Larry Williams, it is calculated and used in ways very similar to that of the Fast Stochastic Indicator (the exception being in the scale, with the latter having a scale of 0-100).
With the Williams % R, -20 is in the overbought range and -80 is in the oversold area.
Best used in ranging markets, traders might go long when the Williams %R falls below the oversold level of -80 and then rises above it or look for bullish divergences [as with the RSI] between price and the Williams % R or go short on a move above -20 which is followed by a fall below that level or on bearish divergences between price and indicator.
How To Trade With Williams % R
As with all oscillators this indicator does not work well in strong trends in either direction; for this reason Stop Losses should always be set to protect the trader from losses arising from this reality.
Also, as the range (e.g. 14 days) remains the same but the price action that those 14 days contains constantly change, (as the price action from 15 days ago drops out of the calculation) there is a risk that the indicator may change much more than the underlying price of the asset itself, particularly if price action in the recent past has been volatile.
Some also suggest that one should wait for a move above -50 (for a buy signal’s confirmation), which would reduce the false signals but also the number of potentially profitable trading signals generated, as the price could have moved significantly by the time that the buy signal has been confirmed.
As with most indicators, this system generates the most reliable signals when used in conjunction with others.
It is important to confirm buy and sell signals with other indicators that measure a different facet of the market being analysed, such as MACD, DMI, Bollinger Bands etc.