Williams %R indicatoranother excellent technical trading tool

By: Mike Estrey
Many stockmarket technical analysts and chart watchers use the well known Relative Strength Index (RSI) as a reliable overbought/oversold indicator, but there are various other highly useful tools out there, and an excellent and simple one is the Williams Percent Range technical indicator.

This was developed by Larry Williams, an expert in trading and systems analysis, and is a slightly different way of evaluating overbought and oversold market conditions. As with the RSI the %R always falls between a value of 100 and 0 (it is actually calculated as a negative figure in some software systems), and two horizontal lines can normally be defaulted to represent the -20% and -80% overbought and oversold levels. RSI watchers often use 30 and 70 as the equivalent levels, but these are not set in stone for either indicator.

The Williams %R formula

The Williams %R indicator uses highs and lows within its calculation, so this is a bonus, and it is inverted by multiplying it by -100 to give the ‘low’ and ‘high’ figures.

The formula which is preset on most software systems is:

((Highest high value (High, Number of periods chosen) - Close)/(Highest high value (High, number of periods chosen) – Lowest low value (Low, Number of periods chosen))) * -100

Williams' original analysis focused on 10 trading days as the number of periods chosen to determine a market's trading range, and then the calculation was made by reference to where the current day’s closing price fell within that range.

There are some similarities with another well known indicator, the Stochastic, (which can be used both as a trend indicator or an overbought/oversold measure), but the Williams %R does not have any smoothing (or fast and slow lines if you like)

A value of 0% on the Williams %R shows that the closing price is the same as the period high, but often the indicator will remain very close to 0% for days on end in a strong bull move where the closing prices are near to period highs.

A value of -100% shows that the closing price is identical to the period low, and the opposite scenario is common here.

What this indicator really does that is very good is to show the difference between the period high and today's closing price within the trading range of the specified number of periods chosen.

It tends to work best in trending markets, and just as with the RSI it is possible to look for divergences between the %R and underlying price movements.

What length of time period to use

Although the indicator was developed on a ten day period length, many software systems now use a 14 day default (same as the RSI). As with all technical analysis, there are no hard and fast rules, and the shorter the period chosen the more volatile the outcome. To achieve less whipsaw action, it is best to use a wider periods range, but this of course results in less signals.

Original trading rules

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