In a previous article, I described how I use Williams %R as a useful oscillator in determining an asset can be considered an overbought or oversold conditions based on the context of recent price action in a defined look back period. I like to use 10 days and one year for context.
I use the 10 days of look back to give me insights into short-term trader psychology. I use the one year look back period to give me insights into long-term trader psychology. In some of my systems I combine both of these measures to give me a consolidated, integrated look at market psychology.
There’s nothing magical about the use of these two specific time frames, nor do I believe that they have any predictive power were cheap theoretical connection to the way the market works, objectively. I simply find them useful to help me frame my trades and understand the market enough so that I can take action.
I have not exhaustively analyzed different time frames to see if there is an incremental advantage for adjusting the parameters, I am simply satisfied that they work good enough to get me into the ballpark for decent trading opportunities.
The two problems that I have with Williams %R are these:
(1) the scale ranges from a high score of zero to a low score of -100. My problem with this is that it is not intuitive and if I were to design this indicator I would use a scale of 0 to 100 which for me is easier to see.
(2) Williams %R incorporates today’s price action in the development of the zero to -100 scale. Normally this is good enough, but there are days when the price of the asset has made a bold break out from the last 10 days trading range. The weight indicator is constructed, you cannot tell this from the reading. If I were to design this indicator from scratch, I would describe today’s price action on a normal scale of 0 to 100 that looked back 10 days starting from yesterday. That means that if today’s price exceeded the highest high of the last 10 days it can have a reading greater than 100 and conversely if it had a lower low than the low of the last 10 days it could have a negative reading. This change would allow you by inspection to identify breakout candidates in both directions and a relative magnitude of the breakout depending on how far from the 0 to 100 scale the new reading stands.
Nevertheless, Williams %R is a simple excellent indicator for most of my trading purposes, and I highly recommend it’s use and study for beginning and journeyman traders.
Recently, I have seen some trading systems with simple rule sets built exclusively from Williams %R which happened use a 30 period look back rather than the standard 10. I’ve only looked at the rule sets superficially, and while the entries makes sense the exits look clumsy and nonintuitive.