The Curious Investor

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The Williams %R oscillator is actually very similar to the two stochastic indicators we discussed earlier. It was created by Larry Williams, a very famous trader and financial educator. He actually still gives seminars and tours the world teaching how to trade in both commodities and equities. The Williams %R oscillator is designed to oscillate between 0 and -100. Each day’s entry is calculated using the formula: (highest high during the period in question - the daily close) / (highest high during the period - lowest low during the period) * -100. Essentially, it is the same formula as the stochastic except it scales based on the highest high as opposed to the lowest low. I have graphed Williams %R and the Slow Stochastic below for your reference.

As you can see, the stochastic and Williams %R follow very similartrends but look rather different. In my experience (which is relatively short), Williams %R is typically more accurate in its signals than the stochastic indicators though is still prone to awkward jerky movements. I would hypothesize that if one could smooth the Williams %R with a longer period or by taking its 3-day moving average (bigcharts.com uses a default 10 period day) that it would be even more accurate.
As with the stochastics, the upper portion and bottom portion of the Williams %R graph are meant to signal that a stock is overbought or oversold. Most people look at the -20 to 0 region as overbought and the -80 to -100 area as oversold. A more conservative approach might have limits set at -30 and -70. Crossing up through -80 (or -70) line would imply that the an oversold stock is about to proceed on an upward price trend as the market corrects from overselling it. Crossing down through the -20 (or -30) line would imply that an overbought stock is seeing itself correct back down to a lower value.

Other methods of using the Williams %R include using its patterns to predict potential price chart patterns. One thing that I’ve noticed is that good confirmation of an uptrend is the “Williams %R Bounce” where the Williams %R oscillates in the overbought region somewhere between 0 and -30 for the extend of the trend. A sign of the trend coming to an end is progressively lower dips around or below -30. The converse of this is likely true for downtrends and trading in the oversold region, but I haven’t taken the time to watch for this. A good example of the “bounce” can be seen on the left side of the chart I attached above during the stock’s run-up at the beginning of the year.

Personally, I typically use Williams%R in place of stochastics and during trends to gauge their progress. I will also use them in a case similar to the one above. Where the stock looks like it has broken out but quickly takes a hit and I want to see if the Williams %R is signaling a spring back. In the case above (looking at the very end of the chart), the Williams %R reflects a big sell off due to a earnings warning but does not reach fully oversold range. The next day, the Williams %R signals a slight turn around. It’s inconclusive, but it helps me to decide to hold the stock (at least for a few more days) in hopes of regaining some of the loss from the market over-correction and in the probably dangerous hope of the stock getting back on its horse and re-starting its uptrend.
For those of you wondering, yes, this is a very recent Nucor (NUE) chart and it is a part of my portfolio at the moment. There is a big lesson to be learned here. I did not take the time to learn about the steel industry specifically the current speculative nature of the American steel industry due to take over rumors that has lead to the growth of many American steel stocks despite tenuous actual business and rising input prices. I bought almost entirely based on rather good looking technicals and am paying the price as a result. Technical indicators are helpful, but they should not be the entirety of your investment decision if you are intending to invest for the medium to long term. For daytraders, the fundamentals are less important and the goal would be more to hope that your quantitative system is effective in predicting price movement more often than it is negatively affected by qualitative variables like bad news or rumors.
If you are interested in trying to put the Williams %R to use for your trading check out this Williams%R trading tutorial. It presents a pretty interesting step by step look at how to trade using the indicator though it is definitely not for those looking to invest for more than a few weeks or a month tops.

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