What is Williams %R Oscillator?
The Williams %R is another type of momentum oscillator, and is used mostly to identify the overbought and oversold condition. This oscillator is developed by Larry Williams.
Therefore this oscillator is also known as Williams Overbought/Oversold Index. The Williams %R resembles like Fast Stochastic Oscillator in many ways other than the scaling range. Stochastic is calculated using the lowest price while the Williams %R uses the highest price in relation with the current close, highs/lows range over a specific period, which usually is 14 days as a default period.
Components of Williams %R:
Williams %R indicator oscillates between 0 to -100 range. The Williams %R consist of three lines:
1. Overbought Line: This line marks at -20. Values above or at -20 indicates overbought condition.
2. Oversold Line: This line marks at -80. Values below -80 is considered to be oversold condition.
3. Center line: -50 is the considered as center line. How the William %R is moving with respect to centerline a bullish or bearish run can be identified.
Example of Reliance Industries Ltd. Explaining Williams %R Oscillator.
How to Incorporate Williams %R Oscillator in Trading?
There are a number of ways a trader can utilize William %R data precisely, which can help in better trading strategies. Below are few of them:
1. To determine the overbought and oversold conditions: William %R can be used to determine the overbought and oversold levels as mentioned above. William %R values above or at -20 indicates overbought condition. Traders can take it sell signal, as buyers are loosing their faith and sellers are taking over as a results the price starts falling.
Similarly William %R values below -80 is considered to be oversold condition. Traders can take opportunity in making their buy calls as the battle is taking side of buyers. As we always mention in our site, it is extremely important that as a precaution traders must add few indicators in their study so that the false signal can be screen out. Conclusive research based on with single indicators may be sometimes very dangerous. It is observed that sometimes the long period of overbought condition is an indication of uptrend. Same is true with oversold condition; longer periods may be indication of downtrend .
2.To find out Divergence: Divergence play strong role in indicating buying or selling signal.
a. Positive Divergence: This is defined as when the price of a stock is making lower lows and the William %R is making higher highs in oversold condition. This indicates a strong buy signal or the strong possibility of trend reversal. Sometimes that’s why Positive Divergence is also known as bearish divergence. Traders have to keep an eye on other indicators as well here.
b. Negative divergence: This is defined as when the price of a stock is making higher highs and the William %R is making lower lows in overbought condition. This indicates a strong sell signal or the strong possibility of trend reversal. Sometimes that’s why negative divergence is also known as bullish divergence. Traders have to keep an eye on other indicators as well here.
3. Using Crossover as a buying/Selling Indicator: Crossing of William %R with central line can be used as a bullish indicator, while crossing down the central line can be taken as bearish signal. However these signal work poorly in trending market.
Precautions while using Williams %R
Traders have to pay a lot attention when using Williams %R as this is very sensitive and active oscillator, and gives a lot false signals also. To validate its strength traders have to incorporate few more indicators before concluding any decision and to make a wise move. Williams %R Always play with stoploss to maximize the profits and minimize the losses.
How to Calculate Williams %R?
Williams %R can be easily calculated having the value of recent close price, highest price and lowest price over a specified period or days. The default period is 14 or 28 days, however trader may use other periods as per their need for interpretation of their data. Below is the formula for calculation of Williams %R.
These days its very easy for the traders to use Williams %R, as they don’t really have to calculate the Williams % R. A number of software are available online, free of cost and user friendly for this.