Williams %R Indicator Overbought and Oversold Trade Signals

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How to Use WPR Forex Indicator for Scalping?

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When you look for one of the key indicators for your trading system, you probably will turn to the experience of several generations of successful traders. The indicators which they use really work with and which really bring profit; it is easy to check based on their growing capital. Well, if such an indicator is included by default in most trading platforms, then this is also not an ulterior motive.

Before reading the article and writing your questions in comments section, I recommend to watch this video. It’s not long, but covers biggest part of questions on the topic.

You must have at least heard of WPR (Williams Percent Range) indicator . It will be useful to learn it’s mechanics, so maybe it can become your reliable trading assistant.
Today we will talk about Williams Percent Range indicator (WPR, %R or Wm%R), developed by Larry Williams. Williams Percent Range (% R) is a dynamic indicator that determines the state of overbought/oversold.

As you know, stochastics lines were introduced by George Lane in the 50s of the last century. All calculations had to be done manually, and a group of traders developed formulas for oscillators, consistently giving them names: %A, %B, %C, etc. Only three proved to be working: %K, %D and %R. The first two curves are known as Lane’s stochastic, and the latter is named after Larry Williams. This indicator was introduced in 1973.
Larry Williams, in the words of J. Lane, “sharpened and improved” the indicator %R invented by a joint effort. Williams even published a book with a promising title “How I Made One Million Dollars Last Year Trading Commodities.”

Characteristics of the indicator

  • Platform: any
  • Currency pairs: any
  • Timeframe: any from H1 and above
  • Trading time: round the clock
  • Type of indicator: Oscillator

Historically, it was the stochastics that became the most common indicator for traders (especially for the Forex market). This indicator is often used to build trading systems, can be combined with moving averages, Bollinger bands and many other indicators which determine the direction of the trend. The %R indicator is much less well known, despite the fact that software developers never forget about it. The meaning of the indicator is as follows: it measures the ability of bulls and bears to close prices every day near the edge of the range for the past period. The Williams index confirms trends and warns about their future changes.

The basic principles of the interpretation of oscill¬ators, considered in the previous articles, are applicable to the oscillator %R. The main signal factor here is also the discrepancy in the areas of overbought and oversold, or the so-called divergence. To build the %R indicator in an inverted scale, its values are usually assigned a negative sign (for example -30%). Values of the indicator in the range from -80% to -100% indicate a state of oversold. Values ranging from -0% to -20% indicate that the market is overbought. The Williams Percent Range indicator has a feature: it can accurately predict the price reversals.
Williams %R takes into account the position of the last closing price in relation to the range – the “highest-lowest price” for the recent period. It expresses the difference in the closing price, which took place a selected number of days ago, and closing prices “today” as a percentage of the range over the recent period. If the WPR chart goes above the upper line, this indicates the strength of the bulls, but also the market being overbought. If WPR falls below the bottom line, we can conclude that bears are very strong, and the market is oversold. The indicator reflects the balance of forces of bulls and bears at the time of market closure. It shows whether bulls can close the market near the top of the range for a recent period or whether bears are strong enough to close prices near the bottom of the range.

Indicator settings of Larry Williams %R

In the MT4 platform, the indicator is called William’s Percent Range, and allows you to set the averaging period, the signal line levels (the default is -80 and -20), as well as the display style (color, line thickness, etc.). Larry Williams recommends using a 10-day period for calculations (by default, MT4 is set to 14). It has the boundaries of overbought and oversold zones at 90% and 10%, respectively (note, not 80 and 20, as in the terminal).

The indicator can be used for different time intervals: daily, during the day or weekly. The weekly %R is usually changed a week before it happens with the weekly MACD histogram. Bending of %R indicates the need to more strictly review the goals and stops, or close the profitable trades. Finally, it should be noted that one cannot always be guided only by the intersections of the %R lines, since the indicator operates quite differently in the ridge and trend markets.
Williams recommends using a 10-day period for calculations. It has the boundaries of overbought and over-sold zones at 90% and 10%, respectively. The rules for us¬ing the% R line are practically the same as those already des¬cribed for stochastic lines.
The value of market cycles when choosing the calculation period

A special way to use %R is to use it in Theory of Cycles. It is recommended to take 5, 10 and 20-day segments, corresponding to the calendar periods: 14, 20 and 56. But for a more accurate calculation, a time period of 1/2 the len¬gth of the cycle is used.
So, when calculating the Wilder’s RSI index, period 14 is us¬ed, which is ha¬lf of 28. Suffice it to mention that twenty-eight calendar days (or twenty exchange working days) represent the dominant mont¬hly trading cycle, which is harmoniously subordinated to other time intervals. It is thanks to the trading cycle in 28 days that the spr¬ead of a five-day stochastic analysis, a ten-¬day pace indicator and a fourteen-day RSI index can be explained, each of which, in fact, covers a period of time equal to 1/4 or 1/2 of this cycle.

Calculation

Strictly speaking, its calculation is a modified formula for %K from the Stochastic Oscillator indicator :
%R = -(MAX (HIGH (i — n)) — CLOSE (i)) / (MAX (HIGH (i — n)) — MIN (LOW (i — n))) * 100
where:

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  • CLOSE (i) — current closing price;
  • MAX (HIGH (i — n)) — the highest for n previous periods;
  • MIN (LOW (i — n)) — the lowest minimum for n previous periods.

The value of the last closing price is deducted from the maximum value fixed for a certain number of days. Then the difference is divided by the value of the price range for the same period. The indicator varies from 0 to -100%. It is 0 when the price closes at the very top of the range.

Advantages and disadvantages

Often overbought/oversold indicators remain overbought or oversold for a long time, while the price continues to rise or fall. When opening a short trade, only because of the seeming overbought, you can mistakenly leave the market long before the obvious signs of its weakening. Especially often this happens with long, established trends: at this time, the indicator can walk within the overbought and oversold areas for a very long time. In general, catching a trend reversal has always been considered a very difficult task, which is not suitable for a beginner.

Nevertheless, with a competent analysis, for example, when working on a trend on rollbacks, WPR well shows turning points. The indicator also proves itself under low volatility and works in the ridge markets.

As it has already been mentioned above, the WPR indicator reacts indeed very quickly to short-term changes in the direction of the instrument’s price. For example, the signals of the WPR indicator on the daily charts are usually at least a day ahead of the signals from the MACD indicator.

Signals from the Larry Williams %R indicator

In general, the analysis of this indicator is exactly the same as for any other oscillators. Therefore, I will not dwell on the methods of its application. I will provide only the main ones.
Indicator %R, being an oscillator, gives signals of overbought/oversold markets, crossing their signal lines. It is also often may be useful to wait for the indicator to exit the area, and then open trades. As I have said above, with obvious trends, the indicator gives a lot of false signals against the trend. All in all, like all oscillators do. In general, when working on a trend on rollbacks in conjunction with WPR, the Bollinger Bands indicator is a great fit. Other channel indicators, for example, Envelopes and Keltner Channels, are also suitable.

With the WPR indicator, the Price Action patterns work well, such as doji, rails, absorption model, inner bar, pin bar and others.
Regarding the choice of the timeframe, when working on PA, the D1 and H1 periods are best suited. In addition, the WPR indicator proves itself perfectly when scalping and pipsing.

Conclusion

Today we have got acquainted with another remarkable classic indicator. Of course, it has the same shortcomings inherent in all oscillators. Nevertheless, the WPR is very fast and sensitive, due to which it is the most popular scalping oscillator, on par with the CCI indicator, and maybe even more popular. But never forget that no matter how perfect the indicator used, it is important to combine its readings with other signals and always adhere to your trading plan under any circumstances, and then success will invariably accompany you.

Williams R Indicator

Williams R Indicator Strategy is based on a single oscillator, which reacts on price fluctuations, shows overbought and oversold market conditions and points to a possible reversal of the price action. The main advantage of the indicator is that it is sensitive and reflects all of the fluctuations on the price chart. Therefore, the best application is in ranging markets during sideways consolidations. However, the strategy can be also applied to trending markets when prices move in a single direction. This flexibility is achieved by shifting the indicator’s support and resistance levels.

The author of the Williams r indicator is Bill Williams, a well known technical analyst and trader. He also developed two more widely used technical indicators – Williams Alligator and Bill Williams Fractals. Although the indicator belongs to the family of oscillators, it has several features in the mathematical formula what allow it to be one of the most sensitive tools for the technical analysis.

What is Williams %R?

Williams %R is a technical indicator placed below the price chart in a separate window. It is an oscillator with a single line ranging between -100 and 0 and showing overbought and oversold conditions. An indicator is a sensitive tool widely used in the technical analysis to point out trend reversals with the best application in a range-bound market. It is suitable for any asset class, including currency pairs, commodities, stocks and cryptos on any timeframe depending on a particular trading strategy.

Here is how the indicator looks like on a price chart:

The main advantage of the trading system based on Williams R indicator is that binary options traders can use multi-directional trading in range-bound market conditions, as well as a benefit on strong trends. The oscillator has a nature of waves, reflecting the change in the relative change of prices compared to close and low values. Let’s have a close look at the indicator’s formula to understand its mathematical background.

How to calculate Williams R

The formula is quite simple as it does not use complicated mathematical constructions and multi-layer calculations. This is why the Williams % R oscillator is so flexible and sensitive.

Here is the main formula:

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Williams % R Formula:
(Highest High – Close Current period) ÷ (Highest High – Lowest Low) x -100

All of the values present in the formula take respective prices within the chosen period, typically 14 candlesticks (days or hours depending on the given timeframe).

Williams Percent R setting

Binary options traders can change several default settings of the Williams R oscillator. The main parameter is the period as it influences the indicators sensitivity and significantly changes the reaction time. The default period is 14 bars. If traders were interested to increase the number of trading signals, then a shorter period would be useful. For example, when trading on ultra-short timeframes with frequent entries a period of 5-13 bars would allow the oscillator to show more opportunities to open deals. On the other hand, if a trader wanted to make a long-term analysis, taking into account strong trend but ignoring small fluctuations, then a longer period in the range of 15-34 bars would help. However, the lag would rise in this case and the number of trading signals will drop. It’s recommended to leave the default period unchanged or maybe adjust it to one of the Fibonacci numbers – 13 bars instead of 14, for example.

The next parameter to change is the source of the formula. In most cases, binary options trading strategies are based on technical indicators applied to close prices as the background of calculations. However, some exotic approaches suggest using open, high, low or OHLC prices for the indicator’s formula.

Two more factors influence the Williams indicators performance. Overbought (-20) and oversold (-80) levels can be shifted to any side. The main goal of such a change is to lower the number of trading signals when shifting levels toward the extreme value or increase the frequency of signals when moving thresholds closer to the middle level. All of the changes significantly affect conditions of the trading strategy, so traders should backtest them on demo accounts before using in real-money conditions.

How to use Williams R indicator?

The main idea of a strategy based on Williams R is to find possible reversal levels when the indicator’s value is reaching extreme values. Most of the oscillators show overbought and oversold conditions when the recent price is getting too far from average means. Financial markets have a feature to come back to volume-weighted and balanced conditions, so oversold and overbought thresholds can represent support and resistance levels, respectively.

Here are the conditions for the trading strategy based on Williams oscillator:

Conditions to buy CALL options

  • Two possible scenarios can signal a bullish reversal after the previous downtrend came to an end. First, if Williams R tests the oversold line from above but bounced back up off it, then traders should consider buying CALL options. Second, if the oscillator’s line is crossing the oversold threshold from below after being in oversold territory for a while, then the crossover can be used as the bullish signal as well;
  • After traders started buying CALL options, they have to get a confirmation from next candlesticks. If the sequence of higher highs and higher lows remains, then traders should continue the trading cycle. In this case, r indicator should keep rising;
  • If the oscillator reversed the direction of its line and headed back south, traders should stop the trading cycle. This happens when prices bounce off a local low but fail to reverse the previous downtrend.

Conditions to buy PUT options

  • Two possible scenarios can signal a bearish reversal after the previous uptrend came to an end. First, if Williams R tests the overbought line from above but bounced back down off it, then traders should consider buying PUT options. Second, if the oscillator’s line is crossing the overbought threshold from above after being in overbought territory for a while, then the crossover can be used as the bearish signal as well;
  • After traders started buying PUT options, they have to get a confirmation from next candlesticks. If the sequence of lower lows and lower highs remains, then traders should continue the trading cycle. In this case, Williams %R should keep declining;
  • If the oscillator reversed the direction of its line and headed back north, traders should stop the trading cycle. This happens when prices bounce off a local top but fail to reverse the previous uptrend.

As far as overbought and oversold lines are used as resistance and support levels, the technical breakout rule applies. For instance, if the oscillator crossed the overbought line from below, bounced back down but remained in overbought territory, traders should continue buying CALL options. A similar scenario happens when prices break through significant resistance. After the breakout, a test of the resistance occurs, and if the bears failed to push the rate back below it, then the upside continuation is very likely. The opposite crossover has to be considered as a signal to stop buying CALL options and reverse the direction of trading.

If you like Williams R Indicator, you might also be interested in this Vortex Indicator

Examples of profitable using

Williams R can be used as a standalone indicator or as a part of a trading system based on combinations of several technical instruments.

Here are several examples of trading decisions:

Buying call and PUT options

The four-hourly chart below shows the EUR/GBP cross-rate in sideways directionless trade. The consolidation works fine for the Williams %R oscillator, which delivers several trading signals according to the main conditions described above. The only limitation, in this case, is to keep trading cycles comparatively short as prices change direction too often to keep buying a call or PUT options.

Buying CALL options for GBP/JPY in a strong trend

The 60-minutes chart below shows GBP/JPY in an intraday upswing. The bullish trend started when Williams %R went off the oversold zone and started edging higher. After entering into the overbought territory, the oscillator delivered several signals to keep buying CALL options for the currency pair as it was bouncing down and coming back into the overbought zone, underlining strong bullish momentum. However, the last red arrow shows that once the indicator breached the support line, came back to it from below, and continued sliding south, the opposite signal was received and traders should have started buying PUT options.

Williams R with MACD

Many oscillators require an additional technical indicator with a different formula to confirm trading signals and extract unnecessary market noise, and WR indicator is not an exception. The main concern for the technical analysis is that the oscillator’s reaction on the change in momentum does not always reflect the depth of a possible retracement or trend. In other words, traders cannot differ the technical correction, which could occur in a sideways range, from a strong trend. In this case, a trend indicator such as MACD could help.

Below is the hourly chart showing USD/JPY performance. The first signal to start buying PUT options was not confirmed by MACD as the histogram was positive although Williams oscillator went off the overbought zone. The second example shows that an additional confirmation came from MACD as both lines crossed each other, pointing to the start of a bearish cycle.

Williams %R – How Traders Use This To Read Buy & Sell Signals

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Last Updated on March 17, 2020

Williams %R is an overbought and oversold technical indicator that may offer potential buy and sell signals. Williams %R is very similar to the Stochastic Fast indicator (see: Stochastics) as the chart below will illustrate:

Like Stochastics, the Williams %R indicator attempts to give buy and sell signals, as is demonstrated in the chart below of the Nasdaq 100 exchange-traded fund QQQQ:

Williams %R Potential Buy Signal

When the Williams %R indicator is below the oversold line (20) and it rises to cross over the 20 line, then a trader might buy.

Williams %R Potential Sell Signal

A trader might sell when the Williams %R indicator is above the overbought line (80) and then falls below the 80 line.

Furthermore, the Williams %R indicator may help identify strong trends; this is discussed on the next page.

The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. Commodity.com shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site. See full disclaimer.

Since the Williams % R indicator is similar to stochastics, it might be useful during sideways, non-trending markets. However, during trends, the Williams % R probably does not fare as well. Nevertheless, the Williams % R indicator can give tell tale signs of strong trends. The following chart of the Nasdaq 100 ETF (QQQQ) illustrates Williams % R’s ability to detect such trends:

As the chart of the QQQQ illustrate, when the Williams % R indicator stays in the oversold area (below 20) and any bullish rally barely registers with the Williams %R (i.e. fails to go above 80), then the downtrend appears to be strong and a trader might avoid any potential buy signals.

Similarly, when the Williams %R indicator stays in the overbought area (above 80) and any attempt at a downturn fails to send the indicator into oversold territory (i.e. fails to go below 20), then the uptrend appears to be strong and a trader might avoid going short.

The Stochastic indicator (see: Stochastics) would be a logical next step for investigation.

Trading with Williams’ %R: How to Spot Trading Opportunities?

The Williams’ %R (usually called the Williams Percent Range or Williams Overbought/Oversold Index) is a simple, yet effective technical analysis tool that excels at determining overbought and oversold levels. This indicator would work perfectly on intraday, daily, weekly and monthly time intervals. Being an oscillator, it moves from 0 to -100 and is very close to the Stochastic in the way it works. In order to use %R effectively, you will have to understand how it works, what it is capable of and what are the limitations.

How it works?

Williams’ %R is an oscillator-type indicator, that is quite similar in its nature to the Stochastic Oscillator with the most notable difference being their scales. The Williams Percent Range uses a 0 to -100 scale, while for the Stochastic the readings vary from 0 to 100. The Stochastic can also boast a moving average, used as a source of crossover signals.

Williams’ %R compares the current price to the prices over the lookback period

The period, that is used by %R by default, is 14 candles. The indicator will, therefore, cover the period of 14 hours for a 1H graph, and 14 weeks for a 7D graph. However, it can be changed to increase the sensitivity of the instrument (alternatively, to lower the number of false signals). The indicator shows how the current price compares to the highest price over a set period of time.

Now, to the indicator’s readings. When they get close to 0, it means that the current price is getting close to (or above) the highest price, observed during the selected period. When the opposite is true, and the indicator gets to the -100 threshold, the current price is lower than the lowest price of the respective period. Finally, when the readings gravitate to the middle of the channel, the current price is equal to the average price of the lookback period.

How to apply?

There are several ways to put Williams’ %R to work. This indicator is most commonly used to determine overbought/oversold levels, provide momentum confirmations and trade signals.

Overbought/oversold

When the indicator is above -20, the asset is considered to be overbought. When it falls below -80, the asset is oversold. The good thing is the indicator will use both readings as by default. You, therefore, don’t have to adjust the settings before putting the indicator into action. Don’t let the seeming simplicity of this tool fool you: overbought does not always mean the price is about to go down, just as oversold doesn’t necessarily mean that the price action will go through the roof.

Overbought/oversold levels can come in handy when determining optimal entry points

Of course, all trends are destined to reverse. Yet, overbought/oversold levels don’t tell you when to expect the reversal. Suchlike signals can be used to confirm readings, received from other indicators. Beware of false and late signals, however, as they are quite common when trading with a single indicator and no confirmations.

Momentum confirmations

In trading, momentum is just as important as the direction of the trend. A strong momentum means the trend is destined to last some more. Adversely, when the momentum becomes weaker, the trend runs out of its strength and can be expected to stagnate or even reverse. This kind of information is of great use to any trader.

Imagine you have spotted a newborn bullish trend. Should the %R reach -20 and stay above it, the current trend will probably last. If the opposite is true and %R stays below, the trend might be running out of steam and can, therefore, be expected to reverse. The same applies to the negative trends. When the indicator is below -80, the trend is stronger and can be expected to last. When it gets above the -80 threshold, the reversal is possible.

For two times in a row the positive trend runs out of momentum before %R could get to the overbought level

Possible limitations

As most other indicators, Williams’ %R should not be used on its own, as it will provide a lot of false and late signals. And as most indicators, it is also not capable of providing accurate signals 100% of the time. When working with the Williams Percent Range, some traders get out of the trend too early, losing a substantial portion of potential profit. It is, therefore, possible to keep the position open as long as the price is getting overall higher (lower for short positions), disregarding the signals provided by Williams’ %R. It is important to remember that it is still a trading tool, not a ready-to-use strategy.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

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