Hello friends. Over time, those involved in financial markets trading have come to understand what Technical Analysis is and why it’s necessary. As a part of Technical Analysis, indicators attract special attention. Thus, in Forex trading, we use indicators as tools for technical analysis to analyze price movements. Indeed, indicators are our allies in identifying trends, determining entry and exit points, measuring price changes, and establishing support and resistance levels. In this article, we will discuss the “Williams %R” indicator. The “Williams %R (Williams Percent Range)” indicator, also known as Wm%R for short, was developed by American trader, author, and technical analyst Larry Williams. Larry Williams is recognized for creating various trading strategies and technical analysis tools in the world of finance, gaining particular attention for his successes in the futures market. While developing this indicator, Williams aimed to determine where price movements were in relation to the highest and lowest prices over a specific period. In doing so, he aimed to better understand overbought and oversold conditions and make appropriate trading decisions. Wm%R is a leading momentum and trend indicator used to identify overbought or oversold conditions.
Calculation of Williams Percent Range (Wm%R)
Williams %R, also referred to as Williams Percent Range or
Wm%R, is calculated using a rather elementary mathematical formula. This
calculation begins by subtracting the most recent closing price from the
highest price level within a specific time period. Next, the difference between
the highest and lowest price levels during the same period is calculated. This
resulting difference is then processed using a specific formula. As a result,
the obtained value is multiplied by -100 to yield a negative percentage value.
Here is the formula for these calculations:
%R = -100 x (Highest Price - Last Closing Price) / (Highest
Price - Lowest Price)
Typically, the standard lookback period recommended
frequently by Larry Williams is 14. This period is based on gathering price
data within a specific range for the indicator’s calculation.
The Structure of Williams Percent Range (Wm%R) Indicator
The Williams Percent Range (Wm%R) indicator is a type of
negative oscillator that oscillates between -100% and 0%, meaning it takes
values between -100 and 0. Within this range, usually, values below -80
indicate oversold conditions, while values above -20 indicate overbought
conditions. In this indicator, a value of 0% represents a close near the
highest price within a specific period, while a value of -100% represents a close
near the lowest price within that period.
Trading with Williams Percent Range (Wm%R)
One of the needed uses of the indicator is that it helps to
identify possible turning points. We can consider it as a signal indicating the
end of an upward trend and the possibility of entering a downward trend, or
vice versa.
For the Williams %R (Wm%R) indicator, the value of -20%
represents the overbought zone, while -80% represents the oversold zone. In
this context, when the Wm%R indicator rises above the -20% level, it’s expected
that the asset is overbought and might start moving below this level, which
could lead to a decrease in its price. In such situations, we usually consider
giving a Sell order after confirming the signal with other technical
analysis tools. Conversely, when the indicator falls below the -80% level, it’s
assumed that the asset is oversold, and the price might start moving above this
level, suggesting a likely increase in its price. In such cases, we often place
a Buy order. See for example the EUR/GBP chart below. One important
thing to note is that since Williams %R is a leading indicator, the strength of
signals generated for overbought and oversold conditions becomes less reliable
when they appear during a strong trending process. Therefore, especially in strong
trends, instead of using -20% to -80% as reference values for overbought and
oversold signals, we might opt for -10% to -90% values to achieve more
dependable results.
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| Overbought and Oversold Zones on the Wm%R Indicator |
In the Wm%R indicator, the price of an asset can move away
from the overbought or oversold zone and return to its previous zone before
reaching the opposite zone. This is called an “oscillation error” or “swing
failure”. If it departs from the
overbought zone, moves towards the oversold zone, and then returns to the
overbought zone without reaching the oversold zone, it suggests weakness in the
current uptrend and the possibility of an upcoming downtrend. This situation
presents a selling opportunity. If the Wm%R departs from the oversold zone,
moves towards the overbought zone, and then returns to the oversold zone
without reaching the overbought zone, it suggests weakness in the ongoing
downtrend and the possible start of an upcoming uptrend. This scenario provides
a buying opportunity.
We can also use the Wm%R indicator to identify divergences,
just like with other indicators, to make trades. In a positive divergence,
when the price movements of a given financial asset create lower lows, the Wm%R
creates higher lows. This situation suggests that the current downward trend is
losing momentum and a prospective upward trend might begin. If this positive
divergence occurs in the overbought zone, it becomes even more reliable and
offers an excellent buying opportunity. Conversely, in a negative divergence,
when the price movements of the relevant asset create higher highs, the Wm%R
creates lower highs and if it’s in the oversold zone, it becomes even more
significant. This situation provides us with an indispensable Sell opportunity.
See the EUR/GBP example chart above.
Always keep in mind that. When trading in financial markets, any
single technical indicator should not be used alone. This caution applies to
the William %R indicator as well. The Forex market is a highly liquid financial
market. The rapid reflection of news and events in market prices carries a high
level of risk due to sudden price fluctuations. In this situation, relying
solely on one indicator for trading can lead to misleading outcomes, including
the Wm%R indicator. When trading in financial markets, market conditions and
other factors should be taken into account, and every trading decision should
be considered carefully.