Williams %R Trading Guide and Performance

Williams %R is a momentum indicator that measures the relationship between a security's closing price and its highest high over a given period. It's a versatile tool that can be used to identify overbought and oversold conditions.

The indicator is calculated by subtracting the highest high from the closing price and then dividing the result by the highest high. This calculation produces a value between -100 and 0.

A reading of -100 indicates that the security's price has reached its highest high, while a reading of 0 indicates that the price has reached its lowest low. This makes Williams %R a useful tool for identifying extreme price movements.

In practice, traders often use Williams %R to identify potential reversals in the market.

For another approach, see: William S. Price III

Williams %R is a momentum-based oscillator used in technical analysis to identify overbought and oversold conditions.

Developed by Larry Williams, it's the inverse of the Fast Stochastic Oscillator, and readings from 0 to -20 are considered overbought, while readings from -80 to -100 are considered oversold.

Check this out: Oscillator (technical Analysis)

Williams %R oscillates between 0 and -100, with -50 being the midpoint. This means a cross above -50 signals a bullish trend, while a cross below -50 signals a bearish trend.

The default settings use -20 as the overbought threshold and -80 as the oversold threshold, but these levels can be adjusted depending on the security's characteristics.

Here are some key parameters to keep in mind:

It's essential to note that a security can remain overbought or oversold for an extended period, so it's best to use additional indicators to confirm signals.

To use Williams %R effectively, set the indicator to 0 on the highest high price and 100 on the lowest low price. This helps to normalize the indicator.

Williams %R measures the distance between the current price and the highest high price for the past 14 days, or the lowest low price. This gives you an idea of how far the price has fallen from its peak.

The indicator is most useful when the price is near the 80-0 level, indicating a potential reversal.

The Williams %R strategy doesn't work for shorts, unfortunately. It's much more difficult to find profitable strategies on the short side.

The article mentions that backtesting the Williams %R strategy on the S&P 500 (SPY) didn't produce good results for short sales. The best results were achieved using a two-day lookback period, but that was for long positions.

During the 2022 bear market, the strategy still managed to rise 15.7%, but that's not the same as making profitable short sales. The article doesn't provide specific data on short sales, but it does suggest that finding profitable short strategies is harder than finding profitable long strategies.

Take a look at this: 1099 R Code T Inherited Roth Ira

RSI trading strategies can be a bit tricky, but let's take a look at some facts. The Relative Strength Index (RSI) is a mean revertive indicator, similar to the Williams %R and Stochastics.

One strategy based on the RSI involves entering a trade on the close when the two-day RSI is below 10, and exiting when the close is higher than yesterday's high or when the RSI(2) ends higher than 70.

The CAGR for this RSI strategy was 7.3%, which is lower than the Williams %R strategy's 11.9% CAGR. This suggests that the Williams %R might be a better choice for the S&P 500.

However, it's essential to test and compare different strategies to find what works best for you. The article suggests traders test their RSI strategies and see if they can improve them by using the Williams %R.

Here's a comparison of the two strategies in a table:

Keep in mind that the difference in performance could be due to chance and randomness. But by testing and comparing different strategies, you can find what works best for you.

Williams %R reflects the level of the close relative to the high-low range over a given period of time.

The centerline of Williams %R is -50, which is the midpoint of the oscillator's range between 0 and -100. Think of it as the 50-yard line in football.

Expand your knowledge: Average True Range

Low readings (below -80) indicate that price is near its low for the given time period. High readings (above -20) indicate that price is near its high for the given time period.

A Williams %R cross above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period, suggesting that the cup is half full. Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period, suggesting that the cup is half empty.

There are two major conditions identified by using the %R indicator: standard overbought and oversold conditions, and momentum changes characterized by momentum failures.

Overbought conditions (traditionally defined as values between 0 and -20) can indicate either a trend reversal or in many cases, a strengthening of the current trend. Oversold conditions (traditionally defined as values between -80 and -100) can indicate either a trend reversal or in many cases, a strengthening of the current trend.

Readings above -20 for the 14-day Williams %R would indicate that the underlying security was trading near the top of its 14-day high-low range. Readings below -80 occur when a security is trading at the low end of its high-low range.

For more insights, see: Volume–price Trend

Overbought readings are not necessarily bearish, as securities can become overbought and remain overbought during a strong uptrend. Closing levels that are consistently near the top of the range indicate sustained buying pressure.

Oversold readings are not necessarily bullish, as securities can also become oversold and remain oversold during a strong downtrend. Closing levels consistently near the bottom of the range indicate sustained selling pressure.

Calculating the Williams %R is straightforward, with a default setting of 14 periods, which can be days, weeks, months, or an intraday timeframe.

You can adjust the lookback period to suit your needs, such as using a 5-day period. This formula is: ( (highest high last 5 days – close) / (highest high last 5 days – lowest low last 5 days) ) * -100.

For example, if the close today is 100, the highest high over the last five days was 115, and the lowest low over the last five days was 95, then the Williams %R is -75.

Additional reading: Pimco Low Duration R

Calculating the Williams %R is a straightforward process. The default setting for Williams %R is 14 periods, which can be days, weeks, months, or an intraday timeframe.

To calculate the Williams %R, you need to know the most recent close, the highest high over the last 14 periods, and the lowest low over the last 14 periods. This is the foundation of the calculation.

The formula for Williams %R is ( (highest high last 14 periods – close) / (highest high last 14 periods – lowest low last 14 periods) ) * -100. This formula is a simple ratio that helps identify overbought and oversold conditions.

For example, if the close today is 100, the highest high over the last five days was 115, and the lowest low over the last five days was 95, then the Williams %R is -75. This is calculated by (15/20) * -100.

The lookback period can be adjusted to suit your trading strategy. A 14-period %R uses the most recent close, the highest high over the last 14 periods, and the lowest low over the last 14 periods.

The Williams %R Amibroker code is available for purchase at a link provided in the resources.

The 280 trades associated with this code have a win rate of 81%.

The average return of the trades is 0.88%.

The average winner is lower than the average loser, with a 1.6% average winner and a 2.2% average loser.

Mean reversion strategies, like this one, often exhibit high win rates but can have asymmetric winners and losers.

You might enjoy: Zero Lag Exponential Moving Average

The Williams %R trading strategy has been backtested on the S&P 500 (SPY) with impressive results. The strategy's equity curve shows a 98.9% return in 2008 and 43.3% in 2020, even during the Covid-19 pandemic.

The best result is achieved with a two-day lookback period, which gives a CAGR of 11.9%. This is significantly higher than the buy-and-hold CAGR of 10.3%. The strategy's market exposure is 22%, with 598 trades, an average gain per trade of 0.6%, and a max drawdown of 17%.

The risk-adjusted return of the Williams %R strategy is 52%, calculated by dividing the CAGR by the time invested in the market (0.22). This is a substantial improvement over the buy-and-hold return.

In comparison, a similar strategy using the RSI indicator on the S&P 500 (SPY) has a CAGR of 7.3%, which is significantly lower than the Williams %R strategy. This suggests that the Williams %R may be a more effective indicator for this market.

Here are the key statistics for the Williams %R strategy on the S&P 500 (SPY):

The Williams %R strategy has also been tested on the Nasdaq/QQQ, with a CAGR of 13.4% and a Sharpe Ratio of 2.9. These impressive results suggest that the Williams %R is a reliable and effective indicator for traders.