Williams %R Indicator

Technical Analysis Indicator Williams %R is an oscillator, for which it works better in lateral trending markets that in those with a strong trend. Basically what it does is measure how close to the maximum or minimum of a certain period of time the prices have closed during the last trading session or during any other time frame chosen by the trader. Remember that like other indicators, it can be used to analyze different periods of time from few minutes to hours, days, weeks, etc.. It was developed by  Larry Williams.

To apply this indicator the trader must select the time period, which is usually 14 periods (but that depends of the trader´s needs). In this case 14 is one of the most common value of this parameter but it  be changed if the trader believes that he will have better results with other values. If the trader is analyzing the market development over a period of 1 or more days, the Williams% R indicates if the closing price of the last session is close or not of the maximum or the minimum of the last 14 sessions.
The idea is that when asset prices are analyzed in a market that is moving in a sideways trend (a trend with no clear direction), the fact that during the last session the closing price is near the maximum or minimum of the last 14 days may be an indication that  is approaching the moment when the market could change its direction and go up or down. In short, if the market is in a sideways trend and the closing price of the last session is near the maximum of the last 14 sessions, probably the price will fall and if the closing price is near the minimum, there is a high probability that the price is going to rise . To calculate this indicator we have to use the following formula:
  • %R = (( HH - Today's Close ) / ( HH - LL )) * -100

LL = Lowest Low price in Period
HH = Highest High price in Period

This indicator is set in a range from 0 to 100. When it takes a value close to 0 it means that the market is overbought so it is likely that the price fall at anytime while if the indicator have a value close to 100 that  means that the market is oversold and therefore is more likely that the price rise. Of course this applies more to trading ranges as shown in the image below: 

Overbought and oversold zones in the Williams %R Indicator

The chart above shows how is graphically applied the indicator Williams %R. In this case we can see that  in periods when the market moves in a sideways trend the %R  coincides almost perfectly with the maximum and minimum in the market. Almost every time the indicator reaches the overbought area  the price of the instrument fall and when the %R reaches the price tends to rise. However when the market moves with a strong trend this indicator ceases to provide reliable signals. This is because the market can stay in a overbought or oversold condition for quite long time during a long trend, so this indicator tends to stay in the overbought/oversold zone and can produce a lot of false signals. In these periods, a trader using this indicator can lost a lot of money because the false buy/sell signals.

However one possibility is to consider only buy signals when the market indicator is an uptrend, and sell signals when the trend is down. Generally the overbought area is located between 0 and 10 of the indicator while oversold values ​​is between 90 and 100. Both areas are marked by two horizontal lines as shown in the chart above. As with other indicators, the main signal with the Williams% R is given when appears a bullish or bearish divergence with respect to the price.

Bullish Divergence Price-Indicator

Analyzing the previous chart we can observe a bullish divergence (indicated by red lines) in which, while prices are falling and making lower lows,  the Williams% R makes higher lows, which is a clear bullish signal to open a buy position in the market. The bearish divergences behave the same way, but of course in the opposite. While the prices set new higher highs, the Williams% R makes new lower highs, which is a clear bearish signal to open a sell position.

The divergences of the Williams %R can be an indicative of the end of a trend and the beginning of a new one, although the trader must be aware that these signals not always function.