Williams %R Trading Strategy (81% Win Rate) – (Backtest)
Williams %R was developed by the famous trader and tax rebellion Larry Williams, who has given names to several technical indicators. Last week we wrote about the WilliamsVixFix indicator, and today we are explaining the Williams %R trading strategy and how to calculate and use the indicator.
Williams %R does work. In this article, we explain how to use Williams %R in a trading strategy, and finally, we backtest trading strategies to see if Williams %R works. Does it work? Our conclusion is that Williams %R seems to work pretty well.
Table of contents:
Key takeaways
- Williams %R is a momentum oscillator developed by Larry Williams that measures how the current close price relates to the recent high–low range over a lookback period (e.g., 5 or 14 days).
- The Williams Percent Range is a momentum indicator widely used in many markets, including stocks, forex, and commodities, to identify potential overbought and oversold conditions.
- It oscillates between 0 and –100, with the overbought threshold typically set at –20 and the oversold threshold at –80. These are referred to as overbought and oversold levels, which help traders spot potential market entry and exit points.
- The indicator moves quickly between extreme levels and is mainly used as a mean-reversion tool – looking for reversals when price gets “too far” from recent highs or lows.
- Overbought and oversold signals generated by Williams %R are not always reliable, as the indicator can remain above the overbought threshold or below the oversold threshold for extended periods during strong trends, potentially leading to false signals.
- True signals and proper usage of the Williams %R often require combining it with other indicators, such as moving averages or the Relative Strength Index (RSI), to confirm movements and improve accuracy.
- Formula:Williams %R = ((Highest High – Close) / (Highest High – Lowest Low)) × –100 This gives a value between 0 and –100.
- A simple Williams %R strategy was backtested on the S&P 500 (SPY) with varying lookback periods. Short lookbacks (e.g., 2 days) produced the best results.
- Example results:
- CAGR ~ 11.9% vs buy-and-hold ~10.3%
- Market exposure around 22%
- Profit factor ~ 2.2
- Max drawdown ~ 17%
- Risk-adjusted return (CAGR / exposure) ~ 52%
- The strategy performed well in periods like 2008–09 and 2020, and still posted positive results even in 2022 when the stock market went down.
- Williams %R didn’t work well for short trades in their tests.
- A comparable RSI-based mean-reversion strategy was tested. The Williams %R strategy outperformed the RSI (e.g., higher CAGR).
- Adding a second indicator to filter signals further improved performance on Nasdaq (QQQ) and SPY, yielding high win rates (~81%) with solid risk-adjusted returns and profit factors.
- Typical characteristics of these mean-reversion setups: high win rate but smaller average wins relative to losses.
What is the Williams %R indicator and how does it identify overbought and oversold conditions?
Williams R Trading Strategy
(In table 2 in the pic above, there is a mistake: you buy when -80 and sell when -20 is correct.)
The Williams %R fluctuates between 0 to -100. It’s an oscillating indicator and reflects the current closing price relative to the highest high and lowest low for the selected time period. The calculation uses the current closing price of the underlying security compared to its recent high-low range, which helps assess price momentum and potential reversals.
The Williams Percent Range indicator is typically plotted below the price chart to help visualize overbought and oversold zones. This allows traders to see how the closing price of the underlying security is positioned within its recent high-low range over the chosen time period.
The indicator is somewhat similar to the stochastic indicator; however, it measures the close relative to the lowest low. A high reading is considered overbought, and low readings are considered oversold.
Here is how a 5-day lookback period looks in the S&P 500:
Williams %R example
Williams %R goes quickly from overbought and oversold conditions. Thus, it is mainly used as a mean reversion indicator.
How do you calculate the Williams %R indicator?
If you use a lookback period of five days, the formula looks like this:
Williams %R = ( ( highest high last 5 days – closing price of the underlying security ) / ( highest high last 5 days – lowest low last 5 days ) ) * -100
For example:
If the closing price of the underlying security today is 100, the highest high over the last five-day time period was 115, and the lowest low over the same time period was 95, then the Williams %R is -75 ( (15/20) * -100 )
Williams %R resembles WilliamsVixFix
The Williams %R is similar to the WilliamsVixFix (but inversely related). The chart below shows both indicators using a 22-day lookback period:
Both the Williams Percent Range indicator and WilliamsVixFix can be visualized in an interactive charting environment, allowing for more effective analysis and direct comparison of their signals.
Williams %R – does it work? We backtest some strategies
We backtest the Williams %R trading strategy on the S&P 500 (SPY), and we make the following trading rules:
Entry is at the close when the Williams %R is below -90 and exit, when we sell, is when today’s close is higher than yesterday’s high or when the Williams %R closes above -30.
Stop-loss placements should be based on recent swing highs or lows, not just the Williams %R value (however, we have not included a stop loss).
The overbought zone (above -20) and oversold territory (below -80) are key areas for identifying potential reversals, but overbought readings and oversold levels can persist during strong trends. The Williams %R indicator can remain in overbought or oversold zones for an extended period, which may lead to potential false signals.
The midline of -50 acts as a trend confirmation point: crossing above -50 signals bullish momentum, while crossing below signals bearish momentum. True overbought or oversold signals are best confirmed with other indicators, such as a moving average.
Divergence between price action and the Williams %R (bullish divergence) can indicate a potential trend reversal. Momentum shifts and weakening momentum can be detected by observing failures to reach overbought or oversold levels.
Trading within a trading range (support/resistance) can make Williams %R signals more reliable. A sell signal may be generated when the indicator exits the overbought zone or fails to maintain overbought readings.
By using optimization, we get, perhaps as expected, the best results on short lookback periods. We used a minimum lookback period of two days and a maximum of 25 days. All tests gave a profit factor of two or more, except for 25 days, which produced 1.9.
The best result is a two-day lookback period. This gives this equity curve for SPY since its inception until today:
Williams %R trading strategy
Both during the GFC in 2008/09 and the Covid-19, the strategy performed exceptionally well. The percentage returns in 2008 and 2020 were 98.9% and 43.3%! During the bear market of 2022, it rose 15.7%, still pretty decent!
The returns above are compounded. CAGR is 11.9% (buy and hold is 10.3%), market exposure is 22%, the number of trades is 598, average gain per trade is 0.6%, max drawdown is 17%, and the profit factor is 2.2. These are pretty good numbers!
If we look at the risk-adjusted return we calculate it to 52%. We find this number by dividing the CAGR (annual return) by the time invested in the market, which is 0.22 (22%).
Does the Williams %R work for shorts?
No, unfortunately, and as expected, the Williams %R does not work for shorts. It’s much more difficult to find profitable strategies on the short side!
Williams %R Amibroker code
If you would like the Williams %R code for Amibroker, you can order it at the link below. Additionally, you get the code for all the other free trading strategies we have published:
Williams %R vs. RSI: we test different trading strategies
What is the best indicator: Williams %R or the RSI indicator?
The Williams %R is a mean-reverting indicator, just like the Relative Strength Indicator (RSI) and Stochastics. Let’s test a trading strategy based on the RSI, which is quite a similar criterion to what we did above for the Williams %R:
- Enter on the close when the two-day RSI is below 10
- Exit on the close when the close is higher than yesterday’s high or when the RSI(2) ends higher than 70
These criteria yield this equity curve for SPY since its inception until today:
Williams R vs RSI
The CAGR is substantially lower than for the Williams %R: 7.3% vs 11.9%. Thus, the Williams %R seems to work better for the S&P 500 than the RSI.
It’s important to note that the stochastic oscillator and fast stochastic oscillator are closely related to Williams %R. Both the stochastic oscillator and fast stochastic oscillator are momentum-based technical indicators that measure the location of the closing price relative to the high-low range over a specific period. In fact, Williams %R and the Fast Stochastic Oscillator often produce the exact same lines, but with different scaling, and both are used to identify overbought and oversold conditions for generating trading signals.
Also, the RSI is generally better at filtering out noise in steady equity uptrends compared to Williams %R.
Of course, the difference could be entirely due to chance and randomness. However, we suggest traders should test their RSI strategies and see if they can improve them by using Williams %R.
Williams %R works perfectly with this indicator
We changed the settings somewhat to test another strategy that included a second indicator, and we got this equity curve on Nasdaq/QQQ (logarithmic) from its inception in 1999 until today:
Williams %R best settings
The CAGR is 13.4% (buy and hold is 9.9%), the time spent in the market is 14%, 251 trades, 78% winners, the average winner is 2.3%, the average loser is 2.1%, the profit factor is 3.2, max drawdown is 20.5%, and the Sharpe Ratio is 2.9. These are pretty solid numbers!
If we look at the risk-adjusted return, it comes in at 96%.
Combining Williams %R with chart patterns can help confirm signals and improve reliability, especially when trading in many markets. Williams %R is versatile and can be applied to many markets, including currency pairs, but its effectiveness may vary depending on the asset class. In choppy markets, Williams %R may generate more false signals, so combining it with other tools is especially important.
Let’s look at how the strategy performs for S&P 500 (SPY since inception). We got the following curve:
Williams %R trading rules
The 280 trades have an average return of 0.88% and a win rate of 81%. The high win rate comes at a cost: the average winner is much lower than the average loser: 1.6% vs. 2.2%. Mean reversion strategies typically have a high win rate while the winners and losers are a bit asymmetric (winners lower than the losers). Despite this, the strategy performs really well!
Would you like to know the code and the criteria (in Amibroker/Tradestation and plain English)? You can either order the strategy by clicking the link below, or you can subscribe to our Trading Edges. You can order the strategy on this link (please choose Williams %R Strategy No. 3):
When you have paid, please press the link below to access the code (a text file):
Download the Williams %R strategy no. 3 by clicking here (you need to pay for access)
Alternatively, you can subscribe to our Trading Edges where we send out ideas like this monthly for a lower fee per edge. The edge above will be presented as an edge in a few months.
Look-Back Periods: How Parameter Choices Impact Results
The look-back period is a key factor in how the Williams %R indicator interprets price movements. This parameter determines the window over which the highest high and lowest low are calculated, directly influencing the indicator’s responsiveness to market changes.
A shorter look-back period, such as 5 or 10 days, makes the Williams %R indicator more sensitive to recent price action, allowing traders to quickly spot shifts in momentum, especially in volatile markets where rapid reversals are common. However, this increased sensitivity can also lead to more false signals, particularly in choppy or range bound markets.
On the other hand, a longer look-back period, say, 20 to 30 days, smooths out the indicator’s readings, filtering out some of the market noise and providing more reliable overbought or oversold signals. This approach can be particularly effective in range bound markets, where price tends to oscillate within a fixed range and sudden spikes are less frequent.
The optimal look-back period for the Williams R indicator often depends on your trading style and the prevailing market conditions. Active traders in fast-moving, volatile markets may prefer shorter periods, while position traders or those operating in calmer environments might benefit from longer settings. Ultimately, it’s essential to experiment with different look-back periods and backtest your strategy to find the most effective configuration for your chosen market.
Real-World Applications of Williams %R Strategies
The Williams %R indicator is a versatile tool that can be adapted to a variety of trading strategies across financial markets. One of its most popular uses is in mean reversion trading, where traders look to capitalize on overbought and oversold conditions. For example, a common approach is to buy when the Williams %R drops below -80, signaling oversold readings and a potential rebound, and to sell when it rises above -20, indicating overbought conditions and possible price exhaustion.
Beyond mean reversion, the Williams R can also be integrated into trend following strategies. In this context, traders might enter long positions when the indicator climbs above -50, suggesting growing buying pressure, and exit or consider short trades when it falls below -50. Additionally, the Williams %R indicator can help identify breakout opportunities by watching for oversold conditions followed by a sharp move above the midpoint, signaling a potential shift in momentum.
These strategies are not limited to stocks—they can be applied to futures, forex, and other asset classes, making Williams %R a valuable addition to any trader’s toolkit. By using the indicator to identify overbought and oversold conditions, traders can better time their entries and exits, adapt to changing market dynamics, and enhance their overall trading performance.
Best Practices for Trading with Williams %R
To maximize the effectiveness of the Williams %R indicator, it’s important to follow a set of best practices that help filter out market noise and improve the reliability of overbought or oversold signals. One of the most effective approaches is to combine Williams R with other technical analysis tools, such as moving averages or the Relative Strength Index (RSI).
This multi-indicator strategy can help confirm signals and reduce the likelihood of acting on false alarms, especially in strong trending markets where momentum oscillators alone may be misleading.
Adjusting the look-back period to suit current market conditions and your specific trading strategy is also crucial. For example, in highly volatile environments, a shorter look-back period may help you identify overbought or oversold conditions more quickly, while a longer period can provide more stable signals in calmer markets.
Always be mindful of the potential for false signals, particularly during strong trends or sudden market shocks, and use proper risk management techniques—such as stop-loss orders and position sizing—to protect your capital.
By integrating Williams %R with other technical analysis tools and adapting your approach to the prevailing market conditions, you can more effectively identify overbought and oversold zones and make informed trading decisions that align with your risk tolerance and trading objectives.
Strategy Optimization: Enhancing Your Williams %R Performance
Optimizing your Williams %R trading strategy involves more than just selecting a look-back period—it’s about fine-tuning every aspect of your approach to suit your trading goals and the market environment. Start by experimenting with different look-back periods to see how the indicator responds to various market conditions.
For short-term trading, a shorter period may provide more timely overbought or oversold signals, while a longer period can be better for capturing broader trends.
Combining the Williams R indicator with other technical analysis tools, such as moving averages or the RSI, can help confirm signals and filter out noise. Adjusting the overbought and oversold thresholds—perhaps using -85 and -15 instead of the standard -80 and -20—can also help tailor the indicator to your specific trading strategy and reduce the risk of false signals in certain markets.
Backtesting is essential: always test your optimized strategy on historical data to evaluate its effectiveness and make necessary adjustments. By continually refining your approach and integrating Williams %R with other technical analysis tools, you can enhance your ability to spot high-probability overbought or oversold signals, adapt to changing market conditions, and make more confident trading decisions.
Conclusion: Williams %R does work
The Williams %R trading strategies are pretty similar to the WilliamsVixFix. However, the Williams %R seems to perform slightly better in our backtests. Moreover, on a wide range of backtests, Williams %R performs better than the RSI and Stochastics in the strategies we tested.
We believe the Williams %R is an underappreciated indicator!
