Williams Percent Range

Williams’ Percent Range indicator also referred to as Williams %R, is a technical indicator developed by a Larry Williams.  It is a momentum indicator that determines the oversold and overbought levels in the market.

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The Williams %R ranges in percentages, unlike the other oscillators that move in integer values. It ranges over the values of 0% and -100%. When the oscillator is near the -100% region, it means that the currency is oversold and when it is around the 0% region, it means that the currency is overbought.

-20% and -80% are key levels which shall be discussed in the further sections. The Williams %R can also be useful in determining entry and exit points of a trade. It relatively compares the currency’s closing price to the high-low range over a specified number of periods. Similar to oscillator indicators, the default period value is set to 14.

Calculation of Williams Percent Range

The formula for calculating Williams’ %R is,

%R = (Highest High – Close) / (Highest High – Lowest Low)

Where,

Highest High– the highest price of an asset in the recent specified period (typically 14)

Close– the most recent closing price

Lowest Low– the lowest price of an asset in the recent specified period (typically 14)

Explanation of the Calculation

The below explanation is for the Williams’ %R whose period is set to 14.

Find the highest and lowest price the currency has attained in the last 14 bars. Next, note the current price. Substitute all the values obtained in the formula above. Do the same calculation as mentioned above for all subsequent new bars.

Interpretation

According to the period chosen (typically 14), it determines where the present price is relative to the range marked by the difference between the highest and the lowest prices the market has hit in that period. When the indicator hovers around the 0 and -20 levels, the price is said to be overbought, since the price is near the highest region over the given period. And, when the indicator is between the levels of -80 and -100, the price is said to be oversold, because it means the price is near the lowest area over the specific period. Therefore, the indicator predicts price reversal. It should be noted that there is just a possibility of reversal and does not give complete confirmation that the price is going to reverse.

The -50% line or the centerline is also a key level to watch. If the indicator crosses the centerline, it means that the prices are trading comparatively at higher levels, which implies that there is a possibility of upcoming demand in the market. Contrarily, when the indicator drops below the -50% line, the prices are said to be trading relatively at lower levels, and there could be a possibility of supply in the market.

Fig 1 – The a Chart with Williams %R indicator. – Click on it to magnify

Important note: The overbought region does not indicate that the price is going to drop, and the oversold region does not indicate that prices are going to rise up. It all depends on the overall trend in the market.

If the market is in a strong uptrend, and if the indicator shows that it is overbought, one cannot hit the sells, as the overall picture indicates that the buyers are still strong. Similar is the case in a down-trending market as well. But it might be helpful to characterise the pullbacks. For example, the use of 10-period %R will tell the trader when the market is at the bottom of the last ten bars in an uptrend, or at the top of the last 10 bars in an upward trend. That information and a trigger signal can be a good entry method to catch the trend.

Installation of William %R Indicator on MetaTrader 4 (step by step process)

Below is the main screen of the MT4 trading platform.

Step 1: From the main screen, look out for the navigator box on the left side of the screen. Now, click on the “indicators” option.

Step 2: A set of indicators will show up. Since Williams %R is an oscillator indicator, choose the “oscillator” option.

 Step 3: From the indicators displayed below, select the “Williams Percent range” indicator. This will result in a window, as shown below. Here, modification in the parameters related to the indicator can be done. For example, the period can be changed based on the user’s choice. The default value is fixed to 14.

Hit “ok” and the system will plot the indicator below the chart as shown.

 


Trading strategies using Williams’ %R

Strategy 1:

Below is the chart of USDCAD on the 1H timeframe. When the price moves into the oversold area returns back into the -20 and -80 range, we wait for the price to drop below the -50 line. Once it does, a sell is initiated as shown. The stops are placed above the recent highs, and the trade is closed when the indicator crosses above the -50 line.

Strategy 2: Williams’ %R divergence

In the figure, it can be ascertained that the trend is inclined upwards in the price chart and downwards in the indicator graph. This divergence on Williams’ %R is a powerful technique for giving trading signals. In this example, it indicates that there is a high probability of trend continuation, and hence, it can be shorted.

Cons of Williams Percent Range

It is known that Williams’ %R represents the oversold and overbought region in the market. And, it also provides buy/sell based on it. But, the meaning of overbought or oversold is not that the current trend is going to reverse always. It could also mean that the current trend is getting stronger and stronger and has a high chance of making higher highs. So, we cannot make trading decisions solely on the oversold/overbought levels. Therefore, it is advised to stay away from trending markets for those who trade using this indicator.

The oversold and overbought regions tell that the market might reverse at some point in time. But, it does not tell the exact moment of time when the market is going to reverse. The market could eventually go in the required direction, but before that, it could even stop the traders out and then move. Therefore, Williams’ %R, by itself, does not help in timing the market.

Conclusion

The Williams’ %R is a trading tool that relatively compares the current market prices to the recent high-low ranges over a period of time.

The indicator oscillates between the range 0 and -100.

It shows the overbought and oversold territories in the market.

This indicator also helps in generating buy/sell signals. When combined with other technical factors, this indicator proves to be an important piece in trading.

It is most useful in non-trending channels, although it can be used to enter on pullbacks in trending markets.

To optimise it, it is important to find the best fitting period for the market in place.

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