Advanced Williams %R Divergence Analysis

With proper knowledge and experience, advanced Williams %R divergence analysis can be a valuable addition to any trader's toolkit


1/29/20242 min read

What is Williams %R?

The Williams %R indicator, developed by Larry Williams, is a momentum oscillator that measures overbought and oversold levels in the market. It is a leading indicator, meaning it provides signals before price movements occur. The indicator ranges from 0 to -100, with values above -20 considered overbought and values below -80 considered oversold.

Williams %R is calculated using the following formula:

%R = (Highest High - Close) / (Highest High - Lowest Low) * -100

Traders use Williams %R to identify potential reversals in the market. When the indicator reaches extreme levels, it suggests that the market may be due for a reversal. However, to gain a deeper understanding of potential reversals, traders often turn to divergence analysis.

What is Divergence Analysis?

Divergence analysis involves comparing the price action of an asset with the corresponding indicators. It helps identify discrepancies between the two, which can signal potential trend reversals. In the case of Williams %R, divergence occurs when the price makes a new high or low, but the indicator fails to confirm the move.

There are two types of divergence: bullish and bearish.

Bullish Divergence

Bullish divergence occurs when the price makes a lower low, but the Williams %R indicator makes a higher low. This suggests that the selling pressure is weakening and a potential reversal to the upside may occur. Traders look for bullish divergence as a signal to enter long positions or close out short positions.

Bearish Divergence

Bearish divergence occurs when the price makes a higher high, but the Williams %R indicator makes a lower high. This indicates that buying pressure is weakening and a potential reversal to the downside may occur. Traders look for bearish divergence as a signal to enter short positions or close out long positions.

Advanced Techniques for Analyzing Williams %R Divergence

Confirmation with Price Patterns

While divergence analysis can provide valuable insights, it is always important to confirm signals with other technical analysis tools. One way to do this is by looking for price patterns that align with the divergence signal.

For example, if you identify bullish divergence on the Williams %R indicator, you can look for bullish reversal patterns such as double bottoms or bullish engulfing patterns on the price chart. This confirmation can increase the reliability of the signal and enhance your trading decisions.

Multiple Timeframe Analysis

Another advanced technique for analyzing Williams %R divergence is to incorporate multiple timeframe analysis. Instead of relying solely on one timeframe, you can analyze the divergence signals across different timeframes to gain a broader perspective.

For instance, if you spot bullish divergence on the daily chart, you can zoom in to a lower timeframe, such as the 4-hour or 1-hour chart, to look for additional confirmation signals. If the divergence aligns across multiple timeframes, it strengthens the validity of the signal and increases the likelihood of a successful trade.

Volume Analysis

Volume analysis is another tool that can be used in conjunction with Williams %R divergence analysis. By analyzing volume patterns alongside divergence signals, you can gain insights into the strength of the potential reversal.

For example, if you identify bullish divergence accompanied by increasing volume, it suggests that buying pressure is building up, further supporting the potential reversal to the upside. Conversely, if you spot bearish divergence with high selling volume, it indicates that selling pressure is intensifying, increasing the likelihood of a downside reversal.