Introduction – What’s the Williams’ Percent Range indicator?
The Williams’ Percentage Range Indicator (also known as Williams % R) was created by Larry Williams to perform primarily as a measure of overbought or oversold market conditions. Unlike the Stochastics oscillator, the Williams % R is not graded from down to up but from up to down. This means that the lower indicator values are found at the upper part of the indicator window and the figures increase in descending order as the indicator line moves from up to down. Therefore the 0 level is located at the top, and the – 100 value is located below.
As an oscillator, the Williams % Range indicator has an advantage over other oscillators in being able to detect price reversals early.
Parts of the Williams % Range
The Williams % Range has an indicator line, which snakes in and out of the overbought and oversold areas of the indicator window. This indicator line is by default, the simple moving average with a period setting of 14. The zones which constitute the overbought and oversold areas are demarcated by dotted lines on the MT4 platform. The oversold area is that zone which is between -80 and -100 in the indicator window, while the area located between 0 and 20 is the overbought area.
In order to attach the %R to the MT4 chart, the trader goes to the navigation bar at the top of the platform window interface and clicks “Insert”, then “Indicators”. A drop down menu forms and the trader can click on “Oscillators” and then “Williams % Range”.
How to Trade with the Williams % Range
The Williams % Range indicator comes in handy in trading forex when it is used to:
- Trade price reversals using the trend changes that could occur at the oversold and overbought areas.
- In divergence trade scenarios.
a) Divergence Trading
The indicator line of the Williams %R is used to trade divergences. Prices form highs and lows, and the indicator line usually tracks this price movement with its own highs and lows that match those of the price action. However, the indicator may move away from the price track, creating a divergence. The price will naturally try to correct this divergence by following the indicator. This is the movement that must be captured by the trader’s position. Therefore the %R’s indicator line’s deviation from price action can be traded.
We can see from the image above that the price was initially heading downwards (lower lows) but at some point, the indicator lows were at the same level, showing that they had started deviating from the price lows. The key to trade entry here is the formation of the two pinbar candles that signal the onset of an upward move of price, in an attempt to correct the divergence.
b) Trend Reversal
When the market is at overbought or oversold zones, then the chances of trend reversal are high. The Williams %R is one indicator that traders can count on to tell them where these oversold or overbought areas are located.
The oversold/overbought areas are therefore areas where traders can look to initiate new trades based on changes in the trend, but at the same time, they can also serve as areas where the previous trend ends. Therefore it is also possible to use the %R as an indicator to indicate where an existing trade on the present trend should be closed so that the reversals will not erode profits.
c) Trendline Breakout
This is a rare but potentially profitable setup presented by the %R. In this strategy, the trader is looking for a trend line break opportunity. This setup involves an already established trend connected by a trend line in the direction of the trend, and the trader is looking to trade a reversal break of that trend line. This is performed when the price action and indicator are moving in tandem.
A closer examination of this snapshot above shows the indicator trendline and price action trend line moving in tandem. This is a situation where price was heading downwards so we look for an upward break of the two trend lines. Look carefully at the indicator trend line. Notice that the break of the indicator trend line occurred before that of the price. This is an indication of a possible upward trade opportunity.
These three setups mentioned above are three ways that the Williams %R indicator can be applied in the forex market. However, stringent practice must be deployed on demo before they can be used on a live account.