Price Headleys Williams % R – The Price Headley Way 2008

I was watching an online lecture by Price Headley today and he dove into one of his more straightforward methods for trading. He makes use of the Williams %R indicator, however he sets the bar period to a value of 30.

The following is my interpretation of his methods with a random equity choice during a recent period (picked at random). One thing interesting about my graphical representation of his method is that I show both a “win” and a “loss” to show that this system is indeed realistic and not a holy grail.

One thing I’d like to highlight is the concept of “closing stops” as opposed to standard automated “stops”. Closing stops in this instance, I believe, are considered to be manual stop orders placed each day during the last 15 minutes of the market. The reason for this manual management of stops is to avoid being stopped out during intraday trading. With that being said, on with the example:

Before walking through these two plays, let me explain my color coding strategy for the vertical lines you see within the Williams %R indicator. Blue = Signal Day, Green = Confirmation Day, Yellow = Re-test Day, Red = Exit Day. A signal day represents the upward (Bullish)/downward (Bearish) crossover of the Williams %R line. Once this crossover happens, if it is an upward crossover, we make note of the highfor the signal day and wait for confirmation by seeing a bar close above the signal day high. Likewise, if it is a lower crossover, we make note of the low for the signal day and wait for confirmation by seeing a bar close below the signal day low. For both of these instances, please realize that confirmations can only be issued so long as the Williams %R line has notcrossed back inwards. If the line crosses back inwards and then outwards before a confirmation day is issued, my interpretation would be that we have a new signal day and corresponding high/low to consider for confirmation.

Let’s take the first trade in my example. The first signal day was not issued a confirmation before the Williams %R line dipped back inward. A second signal day was triggered (second vertical blue line) so we then made note of the high for that day by drawing the light blue horizontal trendline. We see that our confirmation day came two days after our signal day, and we entered our position somewhere near the close of $59.82 at the tail end of the confirmation day. Here we also made note to set an initial stop at the low of our signal day at $56.86. Three bars later we were faced with a re-test day because the day closed where the Williams %R line crossed back inward. So in this case, we made note of the low for the re-test day and would then apply it as a closing stop manually during the last 15 minutes of the market each day until we either stopped out or the Williams %R crossed back outward. In this case, it crossed back outward and we could then relax and watch the climb. We received another re-test day on 7/8/08 so we upped our old close stop value to the new signal day low of $67.39. Williams %R again crossed back outward, indicating our ride was not over. Our final re-test day triggered on 7/16/08. While the low of our new re-test day was $70.27, by the time the market was nearing close, the price was already below this value so it was technically below where we would have manually issued our close stop, so we would have exited the trade somewhere around the close at $69.44 on 7/17/08. Our ride lasted from 6/10/08 to 7/17/08 with a net gain of $10.02 in stock price. Using “ThinkBack” on Thinkorswim, I would probably have purchased the JUL08 64 Call for 2.10. On 7/17, this option last sold for 5.60, netting $350 on an initial investment of $210 in approximately 5 weeks.

Our second example was not as fortunate. A signal day was triggered on the short side, followed by a confirmation day the very next day. We would have entered the position toward the end of the day at around close for $63.28. Two bars later Williams %R crossed inward, triggering a re-test day. We then made note of the new closing stop of $66.33 to replace our initial stop of $67.80 derived from the low of our initiating signal day. The Williams %R crossed back outward, relieving our concerns for exiting for a couple days, but then we were hit with another re-test day signal. The high of our new re-test day signal was the exact same as the previous re-test day ($66.33) so our close stop value remained the same and we sat tight to see if we’d make it another day. Unfortunately market close on judgment day wasn’t so kind and we stopped out at near close at $67.04. This ride lasted from 8/11/08 to 8/19/08. I would probably have purchased the SEP08 61 Put for 2.25. On 8/19, this option last sold for 0.75, losing $150 on an initial investment of $225 in a little over a week.

So if you were to take into account both our win and our loss, we still netted $200 between these two plays, even though we weren’t always right, not too shabby!