The Williams %R (WR) indicator is a part of the overall Williams technical analysis strategy. We have already covered one of the Williams indicators – the alligator indicator (WAI).
WR is similar to the stochastic indicator and is an oscillator and works between a range of -100 to zero. The indicator should be used to find entry points and exit points in the market. However, the indicator produces numerous false signals for entry and exit points, especially when used by itself. Instead the indicator is best when used alongside the WAI in order to verify exit and entry points, rather than being used for entry and exit points. In the chart below we can see an example of the WR indicator against BTC/USDT on the hourly chart.
How does it work?
As mentioned earlier, the WR uses the values between zero to minus 100. In the chart below, the range for the indicator can be seen.
Within the range we then have three sets:
- – 20 to 0 = overbought
- – 20 to – 80 = fluctuation zone
- – 80 to – 100 = oversold zone
Other oscillators such as the RSI display sell signals when a cryptocurrency is within its upper levels. For example below we can see the RSI buy signal (30) with the sell signal (70) working superbly on the 4hr chart against BTC.
BTC/RSI 4hr chart
If we compare the RSI price signals in comparison to the WR during the same time period, we can see that the WR is not as effective. There are two main issues which we can see during this period.
The first issue is trade frequency. If you are trading this much, the likelihood is that the trade quality will decrease. This is evident when looking at each trades PnL:
- Trade one = +10%
- Trade two = + 4.8%
- Trade three = 3%
On the whole this is a good PnL return. However, in order to achieve this you would either need to be awake a lot, or use a trading bot.
The second and main issue is that using this method, substantial parts of the trend are not used. If we look at the chart below, we can see that significant sections of the trend (blue boxes) are not captured by the indicator, resulting in the user missing out on potential PnL gains.
BTC/USD – WR trend issue
This issue stems from the fact that cryptocurrencies (when in an upwards trend) can remain ‘overbought’ for a substantial period of time. When looking at the makeup of the WR indicator, this explains why this issue arises.
Why the issue arises
The issue arises because the WR is based on price over 14 periods. Below is the formula for the WR:
WR% = (Highest High – Close) / (Highest High – Lowest Low)
Because of the way the WR is formulated it effectively means that if candles consistently close higher than the previous candle, a cryptocurrency will move into the overbought section. Thus showing an overbought condition. Therefore, when using the WR we need to use it alongside another indicator to show us when the trend is our friend, allowing us to utilise the WR to max effect (WAI indicator makes dramatic entry)…
Maximum utilisation of the WR through the WAI
Based on research, the most effective use of the WR indicator is when it is used alongside the WAI indicator. In order to understand the preceding information it is imperative that you have a good understanding of the WAI indicator.
The following instructions for this strategy should be followed. The strategy in mention revolves around the 1hr charts for BTC. Having tried the strategy on alt coins the conclusion is that it is ineffective, while using higher time frames requires strategy editing.
Buy signal is triggered when the candle moves above the alligator lines with the WR indicator within the overbought zone. The overbought status demonstrates that the new trend is starting and further upside movement is expected.
Sell signal is triggered when the WR indicator hits the oversold 30 level and the candles move within the alligators mouth or below. The oversold level requirement confirms that the alligator is full and could potentially signal that it is going to be sick. When the sell signal occurs you will be able to see clearly that the alligator mouth is shutting.
In the chart below we can see the usage of this strategy.
No usage. This strategy is ineffective when used for shorts. The reason for this is that the alligator indicator is too slow and the risk is increased substantially. The common phrase ‘the bulls take the stairs, the bears jump out the window´ sums up why this is the case well.
This is a bear – a cuddly one
WR indicator conclusion
In conclusion, the WR indicator is powerful and effective, although most traders who take the WR at face value and use it in a similar fashion to the RSI will render it useless. As shown in this article, that assumption is very much not the case. If used alongside the WAI it can be a profitable strategy, although it does require lots of chart watching.