H3: Midline as a Trend Filter
Another way to use the %R is to focus on the midline at −50.
Above, we’ve marked the middle of the oscillator with a dotted line at −50. When the Williams %R moves above this midline, it signals that the trend is up and may continue to move higher.
On the contrary, when the %R line is below the −50 midline, it suggests a weak market that may weaken further.
Obviously, the %R line will cross back and forth between bullish and bearish territory. But generally speaking, it stays contained within one zone for a while. Therefore, a trader could look to initiate positions when the indicator’s line crosses −50 in either direction.
H3: Bullish and Bearish Oscillator Divergence
There are times when the oscillator will move independently of price action, creating divergence. When you spot this happening, it signals that a trend change may soon appear.
For example, on the 2-hour Bitcoin chart above, the price is trading higher from September 13–21. After a brief correction beginning September 21, Bitcoin rallies again to reach a new high.
However, the %R oscillator does not rally to a new high. This divergence, with the oscillator not confirming the new high in price, is a bearish signal that suggests a correction may be at hand. In fact, within a few hours, Bitcoin fell 20%.
The opposite can also occur with bullish divergence.
This 4-hour Bitcoin chart from April 2021 illustrates an instance of bullish divergence. Bitcoin’s price falls going into the first low on April 23. The Williams %R oscillator is deeply oversold, and Bitcoin rallies a small amount.
Then, Bitcoin corrects lower again to reach a new low. However, the %R oscillator doesn’t — which creates bullish divergence. Bitcoin goes on to rally 30% over the next several days.
H3: Williams %R Failure Swing Strategy
There are times when the market is so strong that corrections are very shallow, tending not to become oversold. It’s during these strong markets that you want to be positioned well. The failure swing strategy can help.
On the Bitcoin daily chart above, you can spot when the Williams %R line is trying to correct lower. However, the market is so strong that the %R line barely drops below −50, and doesn’t reach the −80 oversold region.
This is a bullish failure swing because the swing low doesn’t reach oversold levels. If you spot situations like these on a chart, look for opportunities to position yourself to the long side.
With the benefit of hindsight, we can now see that Bitcoin rallied nearly 3× over the next four months as a result of this bullish energy.
H2: Williams %R vs. Alternative Trading Indicators
As a bounded oscillator, there are some similarities between the Williams %R and other oscillators. It’s important to understand the similarities and differences between these oscillators so you can determine which one will work best for you.
H3: Williams %R vs. Fast Stochastic Oscillator
The Williams %R calculates the market’s current level relative to the highest high for the lookback period. On the other hand, the fast stochastic oscillator, which moves between 0 and 100, compares the market’s current level to the lowest low. As a result, these two oscillators essentially do the same thing, and appear very similar on charts.
When you inspect these two formulas, you’ll see they look very similar — with two main differences. The first difference, which we’ve already discussed, is that %R compares using recent highs, while fast stochastic compares using recent lows.
The second main difference is the multiplier. Due to this discrepancy, the %R has a limited output range of 0 to −100, while the fast stochastic oscillator has a range of 0 to +100.
H3: Williams %R vs. Relative Strength Index
Another bounded oscillator is the Relative Strength Index (RSI) indicator. Similar to fast stochastic, the RSI indicator also measures between 0 and 100. However, the similarities end there.
The RSI calculation involves averaging the “up” days against the “down” days. In essence, it’s figuring out the strength with which the crypto market rallies on its bullish days vs. its weak corrections on bearish days. RSI is used to calculate how much a market moves on average.
Notice the difference with the %R, which is a pure price comparison against a range high or low. The Williams %R is calculating how close the current price is to the range high and low.
As a result, you’ll tend to receive completely different values when comparing the RSI to the Williams %R.
Within the Williams %R in the example above, oversold readings below −80 are easy to come by. However, the corresponding RSI readings never do reach the oversold level of 30. As Bitcoin is in an uptrend at the time, its relative strength is apparent in the RSI oscillator, with correspondingly high readings.
H2: The Bottom Line
The Williams %R tool is excellent for helping traders clearly identify overbought and oversold levels for cryptocurrencies. %R is also versatile, as there are four different strategies a trader can deploy when using the oscillator, from simple “buy the dips” to swing failures.
Though the %R scaling isn’t the most intuitive, traders who have worked with stochastic or RSI oscillators will be familiar with how to use Williams %R as an indicator of overbought and oversold markets.