When I first decided to start trading, I thought it was pretty basic – buy stocks when the prices are low and sell them upon booking a profit. Soon I learnt that just like life, trading is anything but basic. Firstly there are different markets in which different assets are traded. Then there are these charts, patterns and trend indicators that can help predict how my securities would perform. But each time I thought I had mastered the market; I learnt something new – a new philosophy, a new trading technique, a new indicator. Here’s one indicator that I found quite interesting – the Williams R indicator.
What is Williams R indicator?
Developed by the famous American stock and commodity trader and author Larry Williams, the Williams per cent range indicator is a momentum indicator. It is regarded as the inverse of another momentum indicator, the Fast Stochastic Oscillator. Pronounced as Per cent R, this indicator reflects the level at which the current close is relative in the market, to the highest high in a look-back period.
Williams per cent range – oscillation and insights
Williams R oscillates between 0 and -100, wherein the 0 to -20 range is considered overbought, whereas the -80 to -100 range is deemed oversold. As such, the indicator provides insights into the strength or weakness of a stock. The indicator is used in several capacities such as identifying overbought or oversold levels, confirming momentums, finding trade signals etc. The indicator also compares the closing price of a stock to its high-low range over a given period or periods, which is usually 14 days.
The Williams R formula – what it is and how is it constructed
As a trader hoping to implement the Williams percent range strategy, you must understand the formula and its construction. This indicator can help you make prudent decisions, especially during complex trading scenarios. The below-mentioned formula is used to calculate the Williams R indicator.
|Williams % R =||Highest High – Current Close||x (-100)|
|Highest High – Lowest Close|
In the above formula:
1. Highest High = the highest price during the look-back period
2. Lowest Low = the lowest price during the look-back period
3. Current Close = the most recent closing price of the stock
4. The indicator is multiplied by -100, by correcting the inversion and moving the decimal.
The four-step calculation method of the Williams R Strategy
Williams R is calculated based on price, generally over the last 14 periods. To calculate the indicator, you must
1. Record each period’s high and low, over 14 periods
2. Note the current, highest and lowest price on the 14th period and fill in all the variables in the Williams R formula
3. At the end of the 15th period, note the current, highest and lowest price (for the last 14 periods only) and compute the new Williams Rvalue
4. Continue using this formula as each period ends, using the data of only the last 14 periods.
5 things you should know about the working of the Williams R indicator strategy
1. The Williams R indicator, like most momentum indicators, appears in a separate window on a chart below the price chart. It is plotted against the -50 range in the middle line, which helps differentiate the strength of a trend.
2. The primary assumption underlying the Williams R indicator is that the price of a stock typically closes regularly at new highs in an uptrend. In contrast, new lows appear regularly during a downtrend.
3. While this indicator focuses only on the last 14 periods, it is scaled between zero and -100. If it shows a reading above -50, the price is said to be moving upwards. If it shows a reading close to -100, it means that stock price has reached oversold levels.
4. Even though the indicator shows an oversold or overbought reading, it should not be interpreted as the stock prices will reverse. Oversold indicates that the price of the stock is in the lower end of the recent range, whereas overbought means that the price is near its recent range’s high.
5. Williams R can be used for generating trade signals, when both, the indicator and the price move out of the oversold or overbought territory.
As you have to with all technical indicators, you should combine the Williams R indicator with other tools used for technical analysis
The Williams R per cent range indicator provides the essential trading signals. While its primary function is to define oversold and overbought zones, it also works in conjunction with other technical indicators which help you identify bearish and bullish divergences as well as failure swings. To know more about Williams R, contact Angel Broking experts.