Williams %R and the trend shift

I was checking the validity of the Williams %R (W%R) over the life of a stock trend this morning in order to determine if it was of any value in setting up spread trades. I couldn't help but look at it in the stock trading light though... which makes perfect sense.

I set a 5 day and 20 day W%R and placed them stacked under an ETF, XLE (Energy), but any would produce the same result.

UPTREND

While the trends are very obvious after the fact I used a 100 day sma to determine a firm trend in place. if the price remains above or below this line (with a 2% envelope) then I consider it trending.

Placing trades based on the 20 day while the ETF was in the latest uptrend worked well to capture the overall trend move. Using the 20 day as an initial guide and the 5 day as a trigger for long only trades resulted in entries at the pullbacks to the zone between the 30 and 50 day sma...it could easily be argued in favour of only doing that, using the smas as triggers, but that is not my goal, I am validating the W%R only.

DOWNTREND

Well, it worked as well in the downtrend in favour of shorting the stock and capturing the overall trend and the shorter swing trades as well. Again the 30/50 sma was a decent trigger zone. This could be used to help validate the trend trading using the W%R as just one more check.

NO TREND

This is where any plan needs to be really worked when trading stocks as it is the transition between up and down trending or while the price hovers undecided for a period...even though it may be under or over the 100 day sma. The trendless period is truly when it hovers over and under this line while in a sort of horizontal range. This is the period when a lot of traders loose money as their great plan stopped working for some "strange reason" and they have no contingency to modify there strategy on the fly.

The W%R flails about with no good trigger as the 5 day reaches highs and lows while the 20 day slowly wallows about. Once the trend is re-established the 5 and 20 take off in the same direction. The beginning of the current trend was so momentum driven that the indicators never really gave a good combined entry signal until the trend settled into a groove. Once recognized it would be easy to trade for anyone.

Jeff.