free download links about online stock trading, forex, futures, stock investing, market, trading systems
WILLIAMS R
Back to contents page

WILLIAMS %R

Williams %R (Wm%R) is a simple but effective oscillator described by Larry Williams in 1973. It measures the capacity of bulls and bears to close prices each day near the edge of the recent range. Wm%R confirms trends and warns of their upcoming reversals

Wm%R = 100 • H r -C /H r -L r

where r = the time window selected by a trader, such as 7 days.

H r = the highest high of the selected period (i.e., a 7-day high). L r = the lowest low of the selected period (i.e., a 7-day low). C = the latest close.

Wm%R measures the placement of each closing price in relation to the recent high-low range. It expresses the distance from the highest high to the lowest low in its time window as 100 percent. It expresses the distance from the latest closing price to the top of that window as a percentage of the range in its window (see worksheet, Figure 29-1). Williams %R is closely related to Stochastic (see Section 30).

Wm%R is designed to fluctuate between 0 and 100 percent. It equals 0 (plotted at the top of the chart) when bulls reach the peak of their power and close prices at the top of the range. It reaches 100 percent when bears are at the peak of their power and close prices at the bottom of the recent range.

A rule of thumb with all oscillators —when in doubt,-make them shorter. This is the opposite of trend-following indicators — when in doubt make them longer. Oscillators with narrow windows help catch short-term rever­sals. If you work with cycles, make Wm%R equal half the cycle length. A 7-day window fits Wm%R fine. Wm%R works well with weekly charts — use a 7-week window.

Horizontal reference lines for Wm%R are drawn at 10 percent and 90 percent levels. When Wm%R closes above its upper reference line, it shows that bulls are strong but the market is overbought. When Wm%R closes below its lower reference line, it shows that bears are strong but the market is oversold.

Crowd Psychology

Each price is a momentary consensus of value among all market participants. The high of the recent range shows how high bulls can lift prices — it reflects their maximum power. The low of the range reflects the maximum power of bears during that period. Closing price is the most important consensus of the day because the settlement of trading accounts depends on it.

Wm%R compares each closing price to the recent range. It shows whether bulls can close the market near the top of the recent, range or bears can close the "market at the bottom of the range. Wm%R measures the balance of power between bulls and bears at closing time — the crucial money-counting time in the market.

Bulls may push prices higher during the day, or bears may push them

lower. Wm%R shows which group is capable of closing the market in its favor. If bulls cannot close the market near the top during a rally, they are weaker than they seem. This is a shorting opportunity. If bears cannot close the market near the lows during a decline, they are weaker than they appear. This is a buying opportunity.

Trading Rules

Wm%R gives three types of trading signals. They are, in order of impor­tance, bullish or bearish divergences, failure swings, and overbought-over- sold readings (Figure 29-2).

When Wm%R rises above its upper reference line, it shows that the market is overbought. When it falls below its lower reference line, it shows that the market is oversold. The best buy and sell signals are given by divergences (marked by arrows). A Class B bearish divergence in July gave a sell signal. A Class A bullish divergence in September gave a strong buy signal.

Failure swings (marked by the letter F) occur when Wm%R reverses without reaching its reference line. This happens during reactions against very strong trends-failure swings confirm those trends. A failure swing during a downtrend in August gave a strong sell signal. A failure swing during an uptrend in September gave a strong buy signal.

At the right edge of the chart, prices are surging. If Wm%R dips below its lower reference line, use that as a buying opportunity. Do not sell short unless a bearish divergence emerges.

Divergences

Divergences between prices and Wm%R rarely occur. They identify the best trading opportunities. When Wm%R rises above its upper reference line, falls, and then cannot rise above that line during the next rally, it creates a bearish divergence. It shows that bulls are losing their power and the market

is likely to fall. A bullish divergence occurs when Wm%R falls below its lower reference line, rallies, and then cannot decline below that line when prices slide again. It shows that bears are losing power and a rally is in the offing.

•  When you identify a bullish divergence, go long and place a protective
stop below the recent price low.

•  When you identify a bearish divergence, go short and place a protec
tive stop above the recent price high.

Failure Swings

Crowds tend to swing from one extreme to the other. Wm%R seldom reverses in the middle of its range. Failure swings occur when Wm%R fails to rise above its upper reference line during a rally or fall below its lower reference line during a decline.

•  When Wm%R stops rising in the middle of a rally and turns down
without reaching its upper reference line, it produces a failure swing.
This shows that bulls are especially weak and gives a sell signal.

•  When Wm%R stops falling in the middle of a decline and turns up
without reaching its lower reference line, that is a failure swing. It
shows that bears are very weak and gives a buy signal.

Overbought and Oversold

When prices close near the upper edge of their range, Wm%R reaches its top and becomes overbought. When prices close near the bottom of their recent range, Wm%R falls and becomes oversold. Neither bulls nor bears are all- powerful. They seldom can close prices near the extreme of the recent range for too many days in a row.

•  When Wm%R rises above its upper reference line, it marks a potential
market top and gives a sell signal.

•  When Wm%R falls below its lower reference line, it marks a potential
market bottom and gives a buy signal.

These overbought and oversold signals tend to work well during flat trad­ing ranges. They become premature and dangerous when the market enters a

trend. Wm%R can stay near the top for a week or longer during a strong rally: Its overbought readings can identify strength rather than a shorting opportunity. Similarly, in a strong downtrend, Wm%R can stay oversold for weeks, indicating weakness rather than a buying opportunity.

Overbought and oversold readings of Wm%R should be used for trading only after you identify the major trend. Use long-term trend-following indi­cators for that purpose (see Section 43). If a weekly chart shows a bull market, take only buy signals from daily Wm%R, and do not go short when it gives a sell signal. If a weekly chart indicates a bear market, sell short whenever daily Wm%R gives you a sell signal, but do not go long when it becomes oversold.

Smarter trading The art of day trading Trading Chaos Sane Investing In An Insane World
Beat The Odds In Forex Trading Robert Kiyosaki - Rich Dad, Poor Dad
The Five Rules For Successful Stock Investing Joe DiNapoli - Trading with DiNapoli Levels