- Williams %R is a technical indicator used to analyse the stock market.
- It is a momentum indicator used by traders to measure where the stock is overbought or oversold, thereby identifying the potential entry and exit points.
- Williams %R takes the closing price and the high-low range of a period as the inputs.
Formulae used to measure Williams %R:
- Williams %R = (Highest High – Close) / (Highest High – Lowest Low)
Where, highest high and lowest low are the highest and the lowest prices in the last 14 periods.
This is the 1 day chart of United Breweries (BSE) around Nov, 2019 to Aug, 2020
- The indicator typically ranges between 0 and -100.
- If the value lies between 0 and -20, it indicates that the stock is overbought and if the value lies between -80 and -100, it indicates that the stock is oversold.
- If the indicator value is below -80 during an upward trend, traders should wait until the value reaches -80. At that point, traders can enter the trade and initiate their long positions.
- Similarly, if the indicator value is above -20 during a downward trend, traders should wait until the value reaches -20. At that point, traders can enter the trade and initiate their short positions.
- Traders can also look at the momentum breaks using the indicator. During a strong upward trend, the value frequently crosses the -20 line.
- But, if the indicator falls below -20 and is unable to reach -20 again without falling, then it signals a trend reversal and a bearish rally is seen thereafter.
- Similarly, during a strong downward trend, the value frequently crosses the -80 line. But, if the indicator rises above -80 and is unable to reach -80 again without rising, then it signals a trend reversal and a bullish rally is seen thereafter.
- The main disadvantage of Williams %R indicator is that the overbought and oversold signals do not always indicate a trend reversal. In fact, they help indicate a strong trend.
- Moreover, the indicator is calculated using the historic values and it does not predict the future price trend. Also the number of periods chosen differs from trader to trader. If a trader choses many periods, the lag can increase, leading to false results.
- Inexperienced traders may take the false results and lead to losses. Hence, the indicator should be used with few other indicators to better analyse the market.