Williams’ Percent Range (Williams %R) is sometimes referred to as the Williams Overbought/Oversold Index and is a simple but effective price movement oscillator created by Larry Williams in 1973. It shows the level of close prices relative to the high-low range for a specified period. It can be incorporated as an additional filter for an existing forex trading strategy and is typically used to identify overbought and oversold price levels to either enter during a price reversal or exit an existing position as a trend comes to its conclusion. Please read on to find out more about the popular Williams percent range indicator.
What is the Williams Percent Range indicator?
The percentage range of Williams percent range is a dynamic indicator that works similar to the Stochastic Oscillator (only Stochastic compares the ratio of the closing price and the minimum for a certain period). In particular, it is very popular for evaluating overbought and oversold markets. The Williams %R is a default indicator that is built-in the MetaTrader 4 platform and thus easily accessible to any trader.
Williams percent range formula:
%R = (Highest High – Close)/(Highest High – Lowest Low) * (-100)
Where:
High – the highest maximum for a certain time, for example, 14 periods
Low – the smallest minimum for a certain time, for example, 14 periods
Close – the last close price.
Conventionally, Williams %R is calculated using 14 periods and can be used for intraday, daily, weekly, and monthly data. The period for calculation (minute, an hour, or day candles) and the number of periods for the calculation can be different, depending on the required sensitivity of the indicator and individual characteristics of the currency, security or product.
The indicator values range from 0 to –100; however, we place the bands at 20 and -80. Look at the chart below to find how the indicator looks on a 1-hour GBPUSD currency pair chart:
Description of the Williams Percent Range indicator
Each price is an indicator of the equilibrium of the market herd at a given price in time. The maximum of the current price range indicates the maximum strength of the “bulls” or buyers. The minimum range shows the maximum strength of the “bear” sellers throughout the entire trading range.
The most important indicator is the close price, which shows which of the groups (buyers or sellers) won in this period, and how significant the victory is. Williams %R compares each closing price with the last trading range and indicates whether the bulls can close the price closer to the maximum of the range of bears and will be able to close the price at the minimum of the trading range.
If the bulls cannot close the market near the maximum range with the existing uptrend, they are weaker than they seem, and this creates an opportunity for a sell off. If the bears are not able to close the market near the lows during a downtrend, they are weaker than it seemed, which allows buying.
In the Williams %R indicator, this is expressed as follows:
- If the close price is close to the maximum range, then the indicator will be near zero (the maximum value of the indicator);
- If the close price is near the low of the range, the indicator will be as close as possible to -100 (the minimum value of the indicator).
How to use the Williams Percent Range indicator?
Let’s discuss some of ways to use the williams percent range indicator in trading.
Williams Percent Range divergence signals
Divergences between the price of an asset and Williams %R are rare, but they can be some of the strongest signals of the Williams %R indicator.
If the price rises to a new high that is higher than the previous one, and the Williams% R indicator makes a new high, but lower than the previous one, it is a negative or bearish divergence and a sell signal.
If the price drops to a new low, which is lower than the previous one, and the Williams% R indicator makes a new low, but higher than the previous one, this is a positive or bullish divergence and a buy signal.
Williams Percent Range overbought & oversold signals
Another way to use Williams percent range is to determine overbought and oversold conditions. This is especially useful for those who are using reversal strategies and range trading strategies.
The overbought condition occurs when Williams %R gets higher than -the 20 level. Entering the zone above –20 is a sell signal.
The oversold condition occurs when Williams %R drops below the -80 level. Entering a zone below –80 is a buy signal.
It is crucial to remember that overbought does not necessarily entail a sell transaction, and oversold – a buy transaction. The market may be, for example, in a downtrend, and the indicator, in this case, can go into the oversold zone and will remain there for a long time, as the price moves lower and lower.
Therefore, when the market conditions are overbought and oversold, the trader should wait for a signal to change the direction of the trend. One of the methods is to wait until the Williams %R indicator either leaves the overbought zone (crosses the –20 value from top to bottom) and oversold (crosses the –80 value from bottom to top) or simply crosses the –50 value from one side.
Other technical indicators or methods of technical analysis can confirm a reversal signal.
Williams Percent Range strategy
You can add other trend indicators like moving averages to confirm the entry signals and to help filter out the false signals.
Williams Percent Range sell signal
- William % R should be near -20 (overbought area).
- Wait for the price to change the direction.
- Wait for the price to break and close below the 20 simple moving average.
Williams Percent Range buy signal
- William % R should be near -80 (oversold area).
- Wait for the price to change the direction.
- Wait for the price to break and close above the 20 simple moving average.
Williams Percent Range Conclusion
The accuracy of the Williams percent range indicator signals can depend on the calculation period setting and additional market analysis. Having set the period of 14 bars, the developer recommended using this setting on the daily timeframe (D1) and higher. It is believed that switching to lower time frames makes signal quality lower. I personally find there is more noise on lower chart time frames and trading higher time frames also means less time spent staring at charts.
The williams percent range indicator is flexible to differing market conditions, thus can be used as part of a forex trend trading strategy and forex range trading strategy. However, notice that the williams percent range indicator may lag like any other statistical indicator.
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