William percent R indicator is a momentum indicator that measures the overbought/ oversold levels. It was developed by Larry williams. Williams percent R strategy helps us to take buy/ sell position in advance before the stock actually makes move, because it is a leading indicator.
The Formula – Though charting software makes all calculations and plot chart accordingly, knowing the formula helps us understand the strategy better.
Williams %R Formula
Interpretation – It is very similar to Stochastic Oscillator. But Williams %R it is plotted upside down. Also Stochastic has internal smoothing compared to it.
Readings in the range of -80 to -100 percent shows the stock is oversold. Similarly -20 percent and below till 0 shows overbought levels. For the purpose of discussion we will omit the negative symbol. The standard parameter for calculations is 14 period (time). Though the formula is valid for n-periods (i.e. any period of time). The formula shown above is calculated for 14 periods.
Pros and Cons
Pros – Williams percent R strategy has the uncanny ability to show reversal, long before the reversal actually takes place. This property helps traders to exit or prepare to take position before price action. The indicator almost always forms Peaks and turns down a few candles before price peaks and turns down. Similarly it makes troughs early and climbs before price bottoms out.
Cons – One must wait for the price action to take place. Williams percent R strategy has a habit of remaining in oversold/ overbought region for long time until price action takes place. Therefore unless price reversal is confirmed from oversold/ overbought levels, it is not wise to take buy/ sell position. Because, even though Williams %R shows oversold/ overbought position, the stock may continue to fall/ climb for long and hit Stop Loss unnecessarily.
The chart above shows hourly chart of Nifty future (June series). The Williams %R makes a trough and reaches nearly -100 percent and starts moving up at 16 June, 2017, 15.15 hours. But price moves later and starts with gap up on 19th June morning. Anybody taking a buy position in Nifty on 16.06.17 after 15.15 would have made handsome profit by 19.06.17. Nifty moved more than 70 points. Similarly on 09.06.17. in the same hourly chart, Williams %R touched -20 percent and started coming down long before price moved with a gap down candle.
Conclusion – Williams percent R strategy if combined with another indicator like MACD (to ascertain price movement) becomes a strong tool and a trader can benefit immensely from this fantastic combination if used judiciously. Check how to use Williams Percent R in a trading system in Aibroker: Designing A Trading System On Amibroker Like Big Trends Toolkit.
Partha, an engineer by education, is theoratically actively following the stock and commodity markets since 1990. He is an active trader since 2003. He has received formal education in future and options and quantum analysis. He is presently working on research oriented projects using Python and data analytics.