Williams %r Indicator: Timing Entry And Exit In Forex – Many traders rely on technical indicators and oscillators within their trading methodology. Most of the popular indicators are based on momentum. This includes indicators like RSI, Stochastic, and MACD. One of the lesser known momentum based technical indicators is the Williams %R indicator. In this lesson, we will learn all about Williams %R and the best app in the markets.
The Williams %R indicator was developed by Larry Williams, a veteran trader and technical analyst. Williams %R is considered a momentum-based indicator and is very similar in construction to the stochastic oscillator.
Williams %r Indicator: Timing Entry And Exit In Forex
Essentially, Williams %R compares and instruments the closing price in its high to low range over a specified period of time. The default time frame is 14 days when studying the daily chart, or 14 periods when studying any other time frame. The primary use of the Williams %R technical study is to measure overbought and oversold levels within price action.
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Williams R percentage = (highest high minus close) / (highest high minus lowest low)
The highest high is equal to the highest price in the lookback period, which is typically set to 14.
The Williams %R indicator gives us information about the current price relative to the highest high over the specified lookback, with a default setting of 14.
The overbought zone within the Williams %R indicator is between the -20 and zero reading. Similarly, the oversold zone within the Williams %R falls between the -80 to -100 reading.
Williams Percent Range
Red arrows correspond to overbought readings on the oscillator, indicating possible selling opportunities, while green arrows correspond to oversold readings on the oscillator, indicating possible buying opportunities.
There are several different ways to use the Williams Percent R indicator within your trading. One of the most popular methods of using Williams %R is as an entry signal when price retraces during a trend phase. More specifically, within the context of an uptrend, traders will often look for a minor dip to enter the uptrend phase expecting an oversold reading on the Williams %R indicator.
And in the same vein, in the context of a downtrend, swing traders will often look for a minor rally to the upside to enter the downtrend phase. In this case, they would wait for an overbought reading on the Williams %R indicator before executing the short trade entry.
As we mentioned earlier, the Williams %R acts as an oscillator and rotates between the extreme readings of zero and -100. Other than the scale, both the Fast Stochastic and the Williams %R generate the same line within each respective indicator.
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It is important to note that when participating in oversold or overbought signals using the Williams %R indicator, you have some additional confirmation before placing a trade. This is because a market can remain overbought or oversold for long periods of time and as such it is prudent to use this indicator in conjunction with some other technical confirmation to increase the probability of success in a trade.
The crossing of the -50 threshold is not as significant a sign as the overbought or oversold reading of the Williams %R indicator. However, it is worth being careful, as it may mark a point where additional demand may enter the market in the case of an upside crossover, or additional supply may enter the market in the event of a downside crossover. lowers it.
Green circled areas represent a cross above the -50 level up from below. And the areas circled in orange represent a cross below the -50 level down from above.
Regular divergence patterns are very powerful trading signals that can predict a possible reversal in the market. Essentially, a bullish divergence sets up a potential buying opportunity as momentum fades to the downside.
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Similarly, a bearish divergence creates a potential selling opportunity as momentum fades to the upside. The Williams %R indicator can be used as a momentum-based indicator to measure these types of divergence signals.
Let’s now try to create a trading strategy based on the Williams %R indicator. The strategy we will describe is a simple pullback trading strategy within the context of a trend phase.
We will use a total of three variables as conditions to enter this trade setup. The first will be the Williams %R indicator, which we will use to find areas where the market is experiencing a short-term rally within a downtrend, or a short-term decline within an uptrend.
In addition to this, we will use the technical study of the Keltner channel. The Keltner Channel is an envelope-based indicator that is overlaid on the price chart. It consists of three lines, with the center line being the exponential moving average of 20 periods.
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The upper line is calculated as the EMA + 2 times the average true range. The lower line is calculated as the EMA: 2 times the average true range. The Keltner Channel is a very versatile trading indicator that can be used in many ways. For our purposes here, we’ll use it as part of our entry signal and as a final stop. There will also be a trend component to this William percentage range strategy. In other words, we will need a way to recognize if the market is trending or if it is trading sideways, within a limited range.
For trend identification, we will keep it as simple as possible. Instead of relying on a trend-based indicator, we will simply analyze the price action and decide if the market is in a trending phase or a consolidation phase. If the market is identified to be in a trending phase, the trade evaluation process will be advanced.
So, now that you know the main components of this trading strategy, let’s go ahead and describe this Williams %R trading strategy in detail.
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Now that we’ve outlined the rules for this Williams percentage range strategy, let’s move on to an example to see what it looks like in action. Below is the eight hour chart of Euro FX futures trading on the CME.
The three blue lines that overlap the price represent the Keltner channel bands. For this strategy, you will mainly focus on the midline. The Williams percent R oscillator is displayed in the lower panel below the price. The upper dotted line of the Williams %R shows the minimum threshold for the overbought reading. The lower dotted line shows the minimum threshold for the oversold reading.
Towards the center right of this price chart, you can see that an overbought reading has been recorded on the Williams %R oscillator. Notice how the %R line crosses above the upper dotted line, which shows that the price is entering an overbought zone.
In order for us to consider a potential short trading opportunity here, we need to confirm that the price action leading up to this overbought reading shows a bearish market trend.
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If you look at the price action leading up to this overbought reading and the blue arrow pointing down, we can clearly see that there was a downtrend. And so our trend filter has been met in this case. Now, in addition to this, we want to confirm that at the time of the Williams %R overbought reading, the price was trading above the center line of the Keltner channel. This can also be confirmed and is shown within the enlarged area near the center of the graph.
With these conditions now satisfied, we can prepare for a short trade in the Euro FX futures. The signal to go short would occur once the price closes below the center line of the Keltner channel. We can see that there is a strong bearish candle that closed below this critical center line. As such, the sell entry would be entered into the market at the start of the next bar, as shown by the blue arrow labeled Sell.
Now we are going to move on to the commercial management process. The first thing we will need to do once our sell order has been executed is to place a hard stop in the market to protect ourselves in the event of an adverse upward price movement. The stop loss should be set at the swing high preceding the sell entry signal, as illustrated by the black dashed line above the entry.
Finally, we would like to closely monitor price action as it starts to move in our favor, which in this case is lower. As we can see, immediately after the sell entry signal, the market began to sell off quite sharply, which led to prices moving below the lower line of the Keltner channel.
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When this happens, it is usually a good sign that the market is experiencing a strong phase of bearish momentum. The output signal would occur when
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