8 min read
The Williams% R (usually called the Williams Percent Range or the Williams Overbought / Oversold Index) is a simple but effective technical analysis tool that stands out in determining overbought and oversold levels. This indicator works perfectly in intraday, daily, weekly and monthly time intervals. Being an oscillator, it moves from 0 to -100 and is very similar to the Stochastic indicator in the way it works. In order to use% R effectively, you will need to understand how it works, what it is capable of and what its limitations are.
How does it work?
Williams% R is an oscillator type indicator, which is quite similar in nature to the Stochastic Oscillator, with the only difference of its scales. The percentage range of Williams uses a scale of 0 to -100, while for Stochastic the readings vary from 0 to 100.
Williams% R compares the current price with the prices during the respective period
The period, which is used by% R by default, is 14 candles. Therefore, in this case the indicator covers the period of 14 hours for a 1H chart and 14 weeks for a 7D chart. However, you can change the settings to increase the sensitivity of the instrument (alternatively, to decrease the number of false signals). The indicator shows how the current price compares with the highest price in a given period.
Now, how to read the indicator? When it approaches 0, it means that the current price is approaching (or exceeding) the highest price observed during the selected period. When the opposite occurs, and the indicator reaches the threshold of -100, the current price is lower than the lowest price of the respective period. Finally, when the readings gravitate towards half, the current price is equal to the average price of the respective period.
How to apply it?
There are several ways to put Williams% R into use. This indicator is most commonly used to determine overbought / oversold levels, provide impulse confirmations and find signals to operate.
Overbought / oversold
When the indicator is above -20, it is considered that the asset is overbought. When it falls below -80, the asset is oversold. The good news is that the indicator uses both readings by default. Therefore, you do not have to adjust the configuration before putting the indicator in action. Do not let the apparent simplicity of this tool fool you: overbought does not always mean that the price is about to go down, just as overselling does not necessarily mean that the stock will go up.
Overbought / oversold levels can be useful to determine the optimal entry points
Of course, all trends are meant to be reversed. However, the overbought / oversold levels do not tell you when to expect the reversal. Similar signals can be used to confirm readings, received from other indicators. Beware of false and late signals, however, as they are quite common when operating with a single indicator and without confirmations.
In trading, momentum is as important as the direction of the trend. A strong boost means that the trend is bound to last a little longer. Conversely, when the impulse becomes weaker, the trend becomes weak and can be expected to stagnate or even reverse. This type of information is very useful for any merchant.
Imagine that you have detected the beginning of an uptrend. If% R reaches -20 and remains above, the current trend will probably last. If the opposite is true and% R stays below, the trend may be losing strength and, therefore, you can expect it to reverse. The same applies to negative trends. When the indicator is below -80, the trend is stronger and can be expected to last. When it is above the threshold of -80, investment is possible.
For two consecutive times, the positive trend runs out of momentum before% R reaches the overbought level
Like most other indicators, Williams% R should not be used alone, as it will provide many false and late signals. When working with the Williams Percent Range, some traders exit the trend too early, losing a substantial part of the potential gains. Therefore, it is possible to keep the position open as long as the price is higher in general (lower for short positions), without taking into account the signals provided by Williams% R. It is important to remember that the indicator is only a tool, not a ready-to-use strategy.
Source: IQOption blog (blog.iqoption.com)