Explain the Williams %R indicator by introducing how it is calculated, how it works? And what is the best setting? With justification for your choice.
Williams %R
The Indicator has an oscillating range of -100 to 0 as against many other available indicators which ranges from 0 to 100. The Williams %R has a very close similarity with the RSI (Relative Strength Signal) though with a disparity of the oscillating or graph range of -100 to 0.
The Williams%R like the RSI indicates upper bands of overbought and lower bands of oversold showing the selling and buying levels respectively. This Indicator can either be in the Overbought, oversold or within the graph, where the upper band ranges from -20 to 0 while the lower band ranges between -80 to -100 then the signals in-between this two ranges signals a market price range, where all combine to give a reader an entry position.
Calculating the Williams %R Indicator.
Using the formula;
Williams %R = [(HP - CP)/(HP - LP)] × -100
Where;
HP: Highest Price in a period
CP: Current Price
LP: Lowest Price in a period
Now applying this formula on a crypto pair, were I choosed the TRXUSD pair over a 1day time frame. I then applied the Williams %R Indicator and took my lowest price, highest price and current price were I calculated it to Confirm if I'll have the same %R as displayed by the charts Indicator. Let's see below.
From the above chart;
Highest price = $0.1070
Lowest price = $0.0830
Current price = $0.0955
Applying it in the formula;
Williams %R = (0.1070 - 0.0955)/(0.1070 - 0.0830) × -100
= 0.0115/0.024 × -100
=0.4792×-100
= -47.92
How it works
After the calculation, like I started earlier were I wanted to confirm if my calculated %R will be in consonant with the one on the chart and as we can see there is just a bit of difference looking at the numbers in the decimals half. In view of the our %R value is between the Overbought and Over sold levels which I classified it as the range level and this level is not a clear entry indication for a trader so a trader using the Williams %R you wait for another entry set up.
Best settings for Williams %R Indicator
By default the Williams %R Indicator has a candle stick trading length of 14 and this is mostly used by many other Indicators as a default length.
The 14 length minimizes fake out or false signal encounters because of it medium number were it is not too long a length or too short a length.
It is worthy of note to traders that even though Indicators and like the one we are working with her mostly carry 14 as thier length of operations by default, a trader is at liberty to choose any length depending on the style of trading he or she is using.
Swing trader were his/her time frame from can range up to weeks or months then a longer length is required such as up to 20 to 30. And then for the Scalp trading were shorter time frame is required then a trader needs a short length say 14, 9 or 7.
In as much as we know our trading style and length to use in order to avoid fake outs and false signals then using the Indicator wit other Indicators is of outmost importants.
How do you interpret overbought and oversold signals with The Williams %R when trading cryptocurrencies? (screenshot required)
Below is the interpretation of the Overbought and oversold signals in relation with the Williams %R Indicator which is the primary signal Indication of the Indicator.
The Overbought Signal
The Overbought naturally is a condition were there is a limited amount of such asset pair in the market and in turn that causes the market price it such asset to sky rocket, when this happens the trader sets the sell order depending on his trading strategy.
Now in the application to the Williams %R, the Overbought signal point occurs on the Indicator when the graph or Indicator line goes above the -20 level and correspondingly shows an effect on the market price to shift away from divergence signal.
It is always important for traders to note that for periods of increasing upsurge of a market price a trend reversal is at the corner, so when the Overbought signal corresponds with the market price then the trader should be expecting a soon trend reversal. Infact from experience a market experience quick reversal at high price increment than when it's on a Downtrend movement. This is usually due to the market activities being that at period of bull alot of traders want to sell and this cause a quick reversal because of surplus availability of such asset in the market and thereby causing a bear.
The Oversold Signal
The OVERSOLD condition is a point in the market were there is surplus of such asset in circulation without a corresponding demand for it, this causes an bear trend to a Support point were traders to take advantage to buy depending on thier strategy.
Conversely, relating that to the Williams %R m, this signal point occurs on the Indicator when the Indicator line goes below the -80 point approaching the -100 level with a corresponding response of the market price to that fluctuation.
After this coalition the market experiences a Reversal often always occuring at the support level, the level of agreement between the Indicator line and the market price. At this point traders buy the asset at a cheaper rate in preparation for a bull. This is prone to the trading requirement or needs of the trader.
What are "failure swings" and how do you define it using The Williams %R? (screenshot required)
Failure Swing in Relation to Williams %R
Like the name implies the failure swing in a real sense is a swing of oscillation that has failed to to go through to the end or above the end point of a particular set target.
So coming back to the Williams %R Indicator, the bench mark for a trend determination are the two band points which are the high and the low points forming the Overbought and the oversold positions, so when the Indicator line fails to get up to the Overbought point that is the -20 and the above or fails to come down below the -80 point (the over sold position) then it is considered a Failure Swing
As seen above, this inabilities or weakness of the %R Indicator at that point causes some quick interval reversals of ups and downs which a trader can take advantage for to buy and sell. It is worthy of note this will really work well for the scalp traders in that he/she will have to use a shorter time frame and observe the market at a close interval to avoid fake out which might lead to loss.
Combining Bearish and Bullish Divergence with William%R Indicator
Normally and theoretically, the indicator is supposed to be moving in tandem with his the price is moving. That is, it should be moving in the same direction. But there are instances, though not very common whereby the price and the indicator move in opposite directions. This situation is what is referred to as divergence. This is also sometimes noticed with Williams%R indicator.
This concept of divergence shows a disagreement between the Williams%R indicator and the price. In reality, it does not occur often as the Williams%R indicator is calculated using data from the actual price.
Once a divergence is recorded or noticed on a chart, the implication is that there is weakness in the current trend and as such, it is going to reverse soon and this can be a signal for traders to place orders as the new trend begins. The divergence situation are of two types. It can be a bullish divergence or a bearish divergence.
- i. Bullish Divergence
A bullish divergence occurs in a situation where the movement in the actual price is towards a downtrend meaning that the asset has fallen in price, while at the same time, the Williams %R indicator is showing that the price is moving in an uptrend and is increasing in value, thus following a bullish trend. In this situation, the selling strenght of bears is low and their power is low as such there will be a change and reversal in trend.
In the screenshot above, the pair of BTC/USDT is shown as experiencing the bullish divergence. Here, the price of the asset is going down while the indicator is gradually rising in value at the early stages. Here, the indicator is showing that a bullish trend will soon commence and this is seen happening shortly afterwards as the bearish tend becomes bullish.
- i. Bearish Divergence
This is the exact opposite of the bullish divergence. In this case, we see the price moving in an uptrend while the inicator is signalling a downward movement towards a bearish orientation. Here the market price is seen to be increasing but the indicator is dropping. In this case, the purchasing power is the sellers is becoming low thus there trend will soon reverse.
Still using the pair of BTC/USDT, as in the screenshot above, we can show a bearish divergence. The price is indicating that the current price of bitcoin is rising. At the same time, the indicator is showing that the price is falling. The indicator is showing that there is reduction in price while the price chart is showing increase in price. The downtrend shown by the indicator soon afterward is initiated. For traders who has taken a long position, they can use this signal to close their trades.
How to Spot Trends Using Williams %R and Also How to Filter Out False Signals
Generally, one major limitation of using technical indicators among other numerous ones is that, their reliability is not guaranteed as they can produce signals that are not accurate and are false.
There some really attractive benefits in using the williams%R indicator. However, it is not immune to the tendency of producing wrongs signals once in a while.
To make this clear, the graph above will be used to illustrate this. Here, the williams%R indicator is had ventured into the overbought region. Being in this region means that the market direction which was in a bullish trend should change anytime from that point to a bearish trend. The reality however is that this did not happen as the price persisted in thIs region for a longer time.
The EMA14 line doesn't confirm the false signal of the Williams %R indicator
Considering this reality, the fact is simply that the accuracy of the williams%R indicator cannot be relies upon. Accordingly, a trader need to seek out ways to get rid of these false signs. This process is what is called filtering of signals.
To filter out false signals from indicators, there are some measures that are available.
One key way to conduct filtering of false signals. One of this is to make use of two or more technical indicators. There are different indicators that can be used for this purpose. One simple one is the exponential moving average (EMA).
Using EMA has been promoted by many traders because some of its advantages. For one, it has upgraded most of the deficiencies of the ordinary moving average
Still making use of the current BTC/USDT market price chart, you can see how the filtering process is. Thus the EMA is being combined with Williams%R which has entered the overbought region.
This meant that the price was going to start going down. However, seeing that the price bars wee yet to cross over to the line. Accordingly, the analysis shows that the signal was not right and the EMA was useful in sorting out the false signals.
How to Use Various Signals From The Williams %R Indicator For Trading
The williams indicators does not give one signal. By using this indicator a trader can get a multiple signals. A trader needs to be conscious of the nature of signal he or she is getting and how it is being interprete.
To answer this question, I will be making use of Cardano and US Dollars currency pair (ADA/USD). A 14 period exponential moving average (EMA) is used along with the williams%R indicator. As discussed above, this combination can be helpful in confirming trading decisions and also in taking out false signals. The chart is on a four hour time frame.
There can be both buy signals and sell signals. First, we will consider the sell signal.
- iSell Signal: Sell signals is always an opportunity for a trader to take a short position and this is usually after the indicator has been in the oversold region.
In this case, the asset price is moving in an uptrend. It continues right into the overbought region as signalled by the indicator. As the market is in this region, it can be deducted that the power of he buyers is beginning to reduce and soon the sellers are going to take over and reverse the trend. This suggests that taking a short trades will be appropriate.
It is ideal to watch out should incase price takes the opposite direction. This point of reversal is very important as it will serve as a resistance level and will be useful in setting a proper stop loss.
Note that the 14 EMA line is being approach and crossed by the bearish candlesticks that are formed. This is a validation or the new trend and a confirmation that the sell signal from the Williams%R indicator is real.
Depending on the trading style and strategy, a trader can immediately take a trade once the reversal breaks our and crosses the EMA line. Otherwise, a trader could wait for more candlesticks to form. It is all about the duration of trade that a trader works with.
To set stop loss for this short position, the point is kept at the reversal point which is a resistance level or some few pips above it.
- ii. Buy Signals: The williams%R indicator can equally produce signals that suggest that the trader should take a long position. To do this, it means the indicator would have already been in the oversold region.
Using our price chart, the prevailing direction of the market is downwards meaning the market was in a bearish condition. The trend goes down into the oversold region. At this point, the sellers are beginning to withdraw their investments and and their power is reducing.
Reversing from the downtrend the market price forms bullish candlesticks. The bullish candlesticks go up and cross over the 14 EMA. At this point, the new trend is being validated and the reversal signal that was produced some time earlier by the williams%R indicator is in agreement with the EMA. With this situation, the buy signal has been confirmed and a trader can decide to jump in the trend and take a long position as the subsequent bullish candlesticks are being formed.
As a precautionary measure, a stop loss and take profit is set the stop loss is at the point where the price got reversed, which is serving as a level of support or few pips below it.
Technical indicators have been used for trading the cryptocurrency market for a very long time. It is very understandable why there are very many of them in existence today. People have came up with different explanations and models about the the dynamics of cryptocurrency assets work.
One can thus number a variety of technical indicators at present. One interesting and functional technical indicator is the Williams%R. This indicator has a strong presence in the cryptocurrency market in terms of usage and popularity. A lot of trader feel comfortable making use of it in their trading activities.
Williams%R indicator is very adaptable. It can be used in a variety of asset categories and can be combined conveniently with other technical analysis tools and well as other indicators. However, just like with most other indicators, it has some weaknesses too. Once in a while, it can be misleading and can generate some wrong signals.
On the whole, this indicator has some really nice usability. A trader who carefully studies and is able to apply it properly stand chances of winning a lot of trades. This has been a really intriguing lesson by Prof. @kouba01.
Hello @davosimple,
Thank you for participating in the 4th Week Crypto Course in its 4th season and for your efforts to complete the suggested tasks, you deserve a Total|8.5/10 rating, according to the following scale:
My review :
Good content in which you were able to answer all questions related to the Williams %R indicator with a clear methodology and depth of analysis which is a testament to the outstanding research work you have done.
Thanks again for your effort, and we look forward to reading your next work.
Sincerely,@kouba01
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