Williams %R

Implication

Bullish: After spending time in the oversold area below –80, the %R line rises back above -80 and continues up to cross the -50 line within 14 days. Trading Central identifies an event at the -50 line crossover.

Bearish: After spending time in the overbought area above –20, the %R falls back below -20 and continues down to cross the -50 line within 14 days. Trading Central identifies an event at the -50 line crossover.

Description

Williams %R, developed by Larry Williams, tracks the relative position of an instrument’s close price to its highest-lowest price range over a 14-bar period. %R values range from zero (higher – price is at the top of the 14-bar highest high range) to -100 (lower – price is at the bottom of the 14-bar lowest low range).

The goal of the %R oscillator is to detect overbought or oversold conditions, with values in the extreme end zones of the range signaling extenuated pricing.

Trading Considerations

When the %R drops under the -80% line the instrument is considered oversold. Conversely, when the %R surpasses the -20% line the instrument is considered overbought. Some technical analysts prefer to use the -75% and -25% lines to define the oversold/overbought boundary conditions.

It should be pointed out that a %R outside the -80% or -20% lines does not necessitate a price reversal. In fact, the price can continue to rise, fall or just stabilize at its present level. To control whipsaw effects, Trading Central identifies the Technical Event® after the %R has left the oversold or overbought ranges and has re-crossed the -50% center line.

The Williams %R is best utilized when a price is oscillating within a non-trending trading range. If the price is trending, then another approach is to use indicators to classify the underlying price trend and then trade on %R events that support this trend. If the price is trending up, then Williams %R center line crossovers heading from -80 to -20 should be considered as long trade opportunities. If the price is trending down, then Williams %R center line crossovers heading from -20 to -80 should be considered as shorting opportunities.

Good trading practice dictates that this oscillator should not be used in isolation: fundamental data, sector and market indications and other technicals should be used to support your trading decisions.