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Williams’ %R

The Williams’ %R, developed by Larry Williams, is very similar to the Stochastic Study, except that the Stochastic has internal smoothing whereas the %R is plotted on an upside-down scale, with 0 at the top and -100 at the bottom. (To show that the %R is plotted in this fashion, the software places a negative sign before the %R values. For the purposes of this discussion, ignore the negative sign.) The %R oscillates between 0 and 100%; a value of 0% shows that the closing price is the same as the period high. Conversely, a value of 100% shows that the closing price is identical to the period low.

The Williams’ %R is designed to show the difference between the period high and today’s closing price with the trading range of the specified period. The study, therefore, shows the relative situation of the closing price within the observation period.

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Properties

Period. The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. If you specify a small value for the length of the trading range, the study may become volatile. Conversely, a large value smoothes the %R, and it generates fewer trading signals. The application uses a default of 10.

Interpretation

Noted author and commodity trader, Larry Williams, developed a trading formula called the %R. In his original work, the method examined ten trading days to determine the trading range. Once the ten day trading range was determined, he calculated where today’s closing price fell within that range.

The system attempts to measure overbought and oversold market conditions. The %R always falls between a value of 100 and 0. The trading rules are simple. You sell when %R reaches 20% or lower and buy when it reaches 80% or higher. However, as with all overbought/oversold studies, it is wise to wait for the instrument’s price to change direction before placing a trade. If an overbought/oversold study, such as the Stochastic or Williams’ %R, shows an overbought level, the best action is to wait for the contract’s price to turn down before selling. For examining the contract’s price, the MACD study is a good technical study. Selling simply because the contract seems to be overbought may take a trader out of the instrument long before the price falls, because overbought/oversold studies can remain in an overbought/oversold condition for a long time even though the contract’s prices continue to rise or fall.

Please note that these values are reversed from normal thinking, especially if you use the RSI as a trading tool. The %R works best in trending markets, either bull or bear trends. Likewise, it is not uncommon for divergence to occur between the %R and the market. It is just another hint of the market’s condition.

Williams defines the following trading rules for his %R:

Buy when
  • Williams’ %R reaches 100%, and
  • five trading days have past since 100% was last reaches, and
  • after which the Williams’ %R again falls below 85/95%.
Sell when
  • Williams’ %R reaches 0%, and
  • five trading days have past since 0% was last reached, and
  • after which the Williams’ %R again rises about 15/5%.

Literature

Williams, Larry. How I Made $1,000,000 Last Year by Trading Commodities. Windsor Books. NY. 1979.

Colby, Robert F., Myers, Thomas A. The Encyclopedia of Technical Market Indicators. Dow Jones – Irwin. Homewood, IL. 1988.

Murphy, John J. The Visual Investor. New York, NY: John Wiley & Sons, Inc. 1996.

Content Source: FutureSource

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