Williams % Range Indicator Explained

Definition of the Williams % Range Indicator

Williams’ Percentage Range Indicator (Williams %R), an indicator created by Larry Williams, is an oscillator which has the ability to determine overbought or oversold conditions in the market.

The Williams’ %R closely resembles the Stochastic Oscillator in behaviour and function, except that the %R is calibrated upside down. It also lacks the smoothing component of the Stochastics oscillator.

W_R

Unlike the Stochastics and other oscillators that calibrate values from down to up (i.e. lower figures are down and increase as we move up), the calibration of the Williams % Range indicator place the 0 point at the top of the indicator window, with increasing values seen as we move down the window. The values of the Williams Percent Range therefore have a minus symbol placed before them, but minus symbol is not taken into account when conducting technical analysis with the indicator.

The indicator’s window is calibrated from 0 to 100%, with figures between 80% and 100% indicating that the currency pair is oversold, while overbought figures are seen when the Indicator values range from 0 to 20%.

An advantage that the Williams Percent Range indicator has over its peers is that it can anticipate price reversals in the asset it is measuring, with peaks and troughs forming and reversing even before that of the asset reverses.

Components of the Williams % Range Indicator

The Williams % Range oscillator is made up of the following components:

  • Overbought zone
  • Oversold zone
  • Indicator Line which is the 14-period SMA line

The direction of the 14-period line shows the trend. If it moves up, the market is in an uptrend. If the line is heading downwards, the market is bearish.

The overbought/oversold zones represent the extremes of price action and are demarcated by 2 lines at -20 and -80. Values between 0 and -20 are in the overbought area, and values between -80 and -100 are in the oversold region. Reversal of price action is possible at price extremes.

Indicator Settings

The indicator is listed on the MT4 among the Oscillator indicators. To attach it to the MT4 chart, click on Insert -> Indicators -> Oscillators -> Williams % Range

W_R2

In terms of appearance, some modifications to the look of the indicator can be made. These modifications can be either to increase or reduce the line thickness of the individual moving averages or to change their colour to make them distinct from each other, especially when several moving averages are used.

Usage of the Wiliams % Range in Forex Trading

The Williams % Range indicator is used in two ways when it comes to forex trading.

  • It is used to detect areas where the currency pair is overbought or oversold.
  • It is used to detect trend reversals.
  1. As an Overbought/Oversold Indicator

That the price action of the currency pairs hit the overbought or oversold areas are not clear indications for traders to go short or go long. There has to be some other added reason to want to trade. The presence of candlesticks or chart patterns is a technical parameter that can be used in conjunction with the overbought/oversold signals given by the Williams % Range oscillator.

Apart from determining areas where price could reverse, the overbought and oversold regions can also be used to determine the strength of a trend. For instance, if the Williams % Range indicator does not consistently enter the oversold area, this is a signal that the uptrend is going to continue. The trader would then look for some reason on the chart to place a Buy order. Similarly, if there is a pullback and the asset is still not oversold, this gives room for re-entry trades. The same setups can be traded in reverse for the overbought zone.

  1. Divergence Trading

Since the Williams % Range indicator is also an oscillator, it also lends itself very well to divergence trading. Divergences are areas where the peaks and troughs of price action do not conform to the peaks and troughs of the indicator. A bullish divergence is seen where price makes a lower low but a higher low is seen on the %R. A bearish divergence is seen when price action forms a higher high but the %R makes a lower high. In both cases, price action is expected to correct the divergence in the indicator’s direction. Divergences must be confirmed, and trade entry points must have sound technical basis.

Stochastics-Bearish-Divergence

Trade Example

The divergence trade seen in the %R is just the same as it is for the CCI divergence trade example, so we refer you to that article here for instruction on how this is done.

In this example however, we will use the example of when the % R indicator does not enter the overbought and oversold zones, and how this can be used as a gauge of the strength of the trend to set a trade.

Williams_R

 In this trade, we can see a symmetrical triangle forming. Initially, the %R is not oversold, meaning that the price action still has room to move to the upside. The break of the triangle to the upside signals a long trade. Here, the %R has crossed the -50 point, indicating bullish momentum. This is where the BUY trade is set.

The exit point for the trade is when the %R is not in the overbought area. This move was actually good for 100 pips, which is very ok for one trade.

Conclusion

It is essential that you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management.

Leave a Reply