Williams %R, also known as Williams Percent Range, is a technical indicator developed by Larry Williams. It is a momentum oscillator that shows overbought and oversold levels, as well as potential trend reversals in a market.
The Williams %R oscillates between -100 and 0, with readings below -80 considered oversold and readings above -20 considered overbought. When the indicator reaches these extreme levels, it suggests that the market may be due for a reversal.
Formula
The Williams %R is calculated using the following formula:
Williams %R = (Highest High - Close)/(Highest High - Lowest Low) * -100
- Highest High: The highest price of the asset over a set number of periods.
- Lowest Low: The lowest price of the asset over a set number of periods.
- Close: The closing price of the asset for the current period.
The default period used is 14, but traders can adjust this to fit their specific trading strategy.
Interpretation
When the Williams %R is above -20, it suggests that the asset is overbought and due for a potential reversal. Conversely, when the indicator is below -80, it suggests that the asset is oversold and could potentially reverse to the upside.
Traders can also use the Williams %R to confirm support and resistance levels. If the indicator is showing oversold conditions and the asset is approaching a support level, it could be a good entry point for a buy trade. Conversely, if the asset is approaching resistance and the Williams %R is showing overbought conditions, it could be a signal to sell.
A bearish divergence between the asset price and the Williams %R can also be a signal of a potential trend reversal. For example, if the asset is reaching new highs while the Williams %R is making lower highs, it could suggest that the uptrend is losing momentum and could potentially reverse.
Limitations
Like any technical indicator, the Williams %R is not infallible and should not be used as the sole factor in making trading decisions. False signals can occur, especially in strongly trending markets where the oscillator can stay in overbought or oversold conditions for extended periods of time.
Traders should also consider other factors such as volume, trendlines, and other technical indicators before entering or exiting a trade based on the Williams %R.
Conclusion
The Williams %R is a useful tool for traders looking to identify potential trend reversals and confirm support and resistance levels. By examining where the indicator is relative to its overbought and oversold levels, traders can make informed decisions about when to enter or exit a trade.
But as with any trading indicator, it should be used in combination with other factors to increase the likelihood of a profitable trade. Always remember to practice good risk management and never trade with more than you can afford to lose.