Williams'% R – a valid alternative to the Stochastic

7 min read

Williams '% R (also called "Williams' Percent Range or Williams Overbought / oversold Index) is a simple but highly effective technical analysis tool, perfect for determining overbought and overdeveloped levels. The indicator works best on intraday, daily, weekly and monthly time intervals. Being an oscillator, it moves from 0 to -100 and, for its operation, it is very similar to the Stochastic. In order to use% R effectively you need to understand how it works, what it can do and what its limitations are.

How does it work?

Williams'% R is an oscillator type indicator, very similar in nature to the Stochastic Oscillator, with only the difference in the scales. The Williams Percent Range employs a scale from 0 to -100, while for the Stochastic the readings can range from 1 to 100. The Stochastic also employs a moving average, used as a source of crossover signals.

Williams'% R compares the current price with prices from a previous period

The default period used for% R is 14 candles. The indicator will therefore cover a period of 14 hours for the 1-hour chart, and a 14-week period for the 7-day chart. However, the interval can be changed to increase the sensitivity of the instrument (alternatively, to reduce the number of false signals). The indicator shows how the current price behaves compared to the maximum price of a predetermined period of time.

Now let's see the indicator reading. When approaching 0, this means that the current price is approaching (or exceeding) the maximum price observed over the predetermined time period. When the opposite occurs, and the indicator approaches the -100 threshold, the current price is reaching lower levels than the minimum price of the predetermined time period. Finally, when the reading settles near the middle of the channel, the current price is equal to the average price of the observation period.

How to apply?

There are several ways in which Williams'% R can be exploited. The indicator is commonly used to determine the overbought / oversold levels, to provide confirmation of momentum, or momentum, and trading signals.

Overbought / Oversold

When the indicator is above the -20 level, the asset is considered overbought. When it falls below -80, the asset is oversold. The good thing is that the indicator generates these default readings. You will not have to adjust the settings before putting it to work. Do not get confused by the extreme simplicity of this tool: overbought does not necessarily mean that the price is going to decrease, as well as oversold does not always lead to a sharp rise in price.

Of course, all trends are destined to undergo an inversion. In fact, the overbought / oversold levels do not suggest when the inversion will occur. These signals can be used to confirm the readings received from other indicators. Beware of false or delayed signals, which however are particularly frequent in trading with a single indicator and without further confirmation.

Confirmation of momentum

In trading, momentum, or momentum, is as important as the direction of the trend. A strong momentum indicates that the trend is destined to last again. On the contrary, when the momentum weakens, the trend loses strength and it is possible to expect a stagnation or an inversion. This type of confirmation is a great help for every trader.

Imagine that you have identified a new upward trend. If the% R reaches the -20 level and remains above it, the current trend will probably last. In the opposite case, if the% R remains below the level, the trend may have lost strength and, therefore, could undergo an inversion. The same applies to downward trends. When the indicator is below the -80 level, the trend is strong and may therefore last. When it reaches the -80 threshold, an inversion is possible.

For two consecutive times the positive trend depletes the strike before the% R has reached the overbought level

Possible limits

Like many other indicators, Williams'% R should not be used alone, as it would generate a multitude of false signals. Working with the Williams Percent Range, some traders leave the trend too early, losing an important part of potential profit. It is therefore possible to keep a position open until the price reaches overall higher levels (or lower for short positions), regardless of the signals provided by Williams'% R. It is important to remember that it is a trading tool, not a complete strategy.

Source: IQOption blog 2018-10-02 12:55:55


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