Williams %R Technical Indicator
Research for Online Investors

This article originally appeared in MarketToday on 6/2/11

by John Dalt

Technical trading involves divining a stock (or commodity) chart for indications of a future move up or down. Most technical traders do not look at the fundamentals of the company such as dividends or profitability. It is all in the charts. Subscribers have asked me, ‘what technical indicators do you use to select your SwingTrader recommendations?’

One of the more interesting technical tools I use is the Williams %R.  I don’t like trading momentum stocks.  As a value buyer of long term investments, I like buying value in the stocks I trade.  This seems to me to provide a hidden margin of safety.  If most technical traders will trade anything (and I have in the past), doesn’t it make sense to trade stocks that have some underlying reason to own them?

The Williams %R was invented by a Larry Williams a stock and commodity trader.  He won the Robbins World Cup Trading Championship in 1987.  He parlayed $10,000 into more than $1.1 million in one year.  The contest used real money and real trades.  He holds the record to this day.

That is a pretty good recommendation for any trading indicator!  What really encouraged me was that his daughter won the same Championship ten years later.  She turned $10,000 into $110,000 in a year to rank her fourth in all time winners.

Michelle Williams is also an actress (Dawson’s Creek & Brokeback Mountain).  I figured if Mr. Williams could teach his daughter to trade stocks, maybe I could profit from his Williams %R indicator!

The Williams %R indicator compares the current closing price of a stock to the highs and the lows for the period of time specified.  I use a 14 trading day period in my analysis.  This one indicator can also tell you if the stock is overbought or oversold, and shows you the possible momentum of the trade.

The Williams %R indicator gives us a daily reading on a stock of 0 to -100.  A reading of 0 means the stock has set or matched its high in the last 14 days, and is overbought.   A reading of -100 occurs when the stock has set or matched the low of the last 14 days.  Mr. Williams would identify a stock that read -100 (meaning it had set its new low in the defined days) then wait five days.  If the stock was between -85 and -95 he would buy the stock.

His indicator was telling him the stock had set a low and was now moving higher.  Conversely if a stock had a reading of 0, indicating a new high and overbought, he would wait five days and if the stock read -5 to -15 he would short the stock.  He believed it was ready to decrease in value.

Here is a chart of Canadian Pacific Railway (CP), a current SwingTrader position.  We recommended this stock on 5/24.  You can see the Williams %R was below -80 on May the 23rd and 24th.  I waited a day to confirm the bottom was in before recommending the trade.

This is not a perfect example of using the Williams %R as the stock did not register a -100 (for a new low) but we used it as an indicator of a trade that was ready to move higher if it caught a bid.

I hope this helps you understand the Williams %R.  Use it with other technical indicators like simple moving averages, stochastic, MacD, Bollinger Bands and the Relative Strength Index.  You will never get all of them to agree on a trade, but that is where you have to make the decision!

One fact needs to be remembered, ‘80% of all trades will follow the market trend.’  If you are wrong about the overall trend, your trades will miss 80% of the time.

Quote:
Speculating is very dangerous business. It is not about winning or losing, it is about surviving the lows and the highs. If you don't survive, you can't win.---Larry Williams inventor of the Williams %R

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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