What is Williams %R?

One of the most important yet confusing things for a beginner investor is to determine when to take a position in a stock. If you invest for the longer term, it does not come with that much of a risk as you can hold the stocks for years. However, if you have bought the stocks to achieve your short-term goals, it becomes vital that you know the ideal entry and exit points. These entry and exit points are the secrets to making hefty profits in the stock market.

That is where Technical analysis and its included factors help investors. Among numerous technical indicators investors use, the Williams %R indicator is one of the most effective and widely used. Read on to understand what is Williams R in technical analysis and how it can help you find the best entry and exit points in the stock markets. But first, a little about technical analysis.

What is Technical Analysis?

Technical analysis is the study of chart patterns, graphs, and diagrams on a screen. The idea is to understand price and volume trends and pick stocks accordingly. Technical analysis believes that whether you talk about fundamentals, news flows, or earnings surprises, they are all in trice and volume. Technical analysis is based on the premise that historical price trends tend to repeat over time. You need to sit with historical stock charts, look at price and volume data, and then plot various trends. Based on past wisdom, you find patterns to trade for the future.

What is Williams %R?

Williams %R is a type of momentum indicator that is included in the process of technical analysis and helps investors to find ideal entry and exit points for a specific stock. The Williams %R is also known as Williams Percent Range and contains a range of 0 to -100. A number between the range indicates the situation of stock and tells whether it is overbought or oversold.

The Williams %R indicator is similar to the Stochastic oscillator and is used as an alternative to the oscillator. Larry Willams developed the Williams %R indicator in technical analysis to compare a stock’s closing price with the high-low range of a stock over a specific period. Typically, the period is fourteen days or periods (trading sessions) but can be extended based on the investor mindset.

Understanding the Williams %R

The main assumption behind the working of the Williams %R indicator is that a stock’s price will close at a new high daily during an uptrend (when the market is going up). However, the stock is expected to close at new lows during a downtrend.

Reading a Williams %R indicator is fairly easy and allows investors to predict a stock’s future trend. For example, if the Williams %R indicator is between -20 and 0, it means the price is overbought (near the recent high of the price range). However, if the Williams %R indicator is between -80 and -100, it means that the price is oversold (far from the recent high of the price range).

Investors can use the Williams %R indicator to find an ideal entry and exit point. During an uptrend, they can research and identify a stock through this indicator to move below the -80 levels. In such a case, if the indicator moves above the -80 levels and the price starts to rise, it would mean that the uptrend in price is happening again, signaling potential profits.

On the other hand, a strong uptrend is always represented by price reaching the -20 levels on the Williams %R indicator. If the Williams %R indicator levels fall and don’t go above the -20 level before falling again, investors can know that a bigger price decline is likely in the future. Investors can also apply this process during a downtrend. If the levels reveal -80 and are not breached before moving higher, it would indicate that the price can go higher soon.

How to calculate the Williams %R?

Here is how you can calculate the Williams %R:

The formula:

Williams %R = Highest High - Close Price/ Highest High - Lowest Low

Here,

• The highest high is the highest price of the stock in the taken period.
• The close price is the most recent closing price of the stock.
• The lowest low is the lowest price of the stock in the taken period.

To calculate the Williams %R, you should first set a lookback, which is generally of 14 periods. Once you have, record the highs and lows for each of the 14 periods to let you identify the highest high and lowest lows. In the 14th period, note the highest price, lowest price, and the current price along with the same prices in the 15th period, but only for the last 14 periods.

Limitations of Williams %R

Here are the limitations of the Williams %R:

As the Williams %R shows you the overbought and oversold stocks, it does not necessarily mean that the trend will be reserved. Taking positions only based on the data provided by Williams %R can force you to incur losses in some situations.

The Williams %R can sometimes be too responsive and overanalyze the data fed to it. As a result, it can give false signals to investors. For example, the Williams %R can indicate an oversold signal by moving higher. However, the price may fail to do the same.

Conclusion

The Williams %R indicator is one of the most effective ways to find ideal entry and exit points for a particular stock. However, as with every other technical indicator, the Williams %R indicator can also give false signals. Thus, it is important to complement the Williams %R indicator’s results with other technical indicators to make a comprehensive trading strategy.