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Williams Percent Range (Wm %R)

What is the Williams Percent Range (Wm %R) Indicator?

The Williams Percent Range (Wm %R) is a leading momentum and trend indicator that was developed by Larry Williams, a renowned commodities trader, in 1973. It is similar to, and more sensitive than, the Stochastic Oscillator, but Wm %R indicates the strength of a trend by measuring where the latest price closes in relation to the highest high and the lowest low of the price range over a look-back period specified by the trader, with the default look-back period being 14.

If the price closes nearer the highest high of the range for the specified look-back period, then the trend is bullish; if the price closes nearer the lowest low, then the trend is bearish. However, Wm %R is plotted as a negative percentage that oscillates between 0 and -100 with 0 indicating that the latest price close is at the highest high of the range; and -100 indicating that the latest price close is at the lowest low of the range.

Furthermore, when the Wm %R values are closer to 0, i.e., between the 0 and the -20 lines, it indicates overbought conditions; and when the values are closer to -100, i.e., between the -80 and the -100 lines, it indicates oversold conditions. Overbought and oversold conditions, in turn indicate potential reversal points in the price action of the security being analyzed.

How to calculate the Wm %R Indicator?

The Williams Percent Range is calculated in two steps. First subtract the latest price close from the high of the range for the period and divide it by the difference between the high and the low for the range of the period. The formula is as follows:

Raw %R = ( High of range − Latest Close ) ÷ ( High of range − Low of range )

where the range is the specified look-back period. The default period for the range is 14.

The second step is to convert the raw %R value to a negative percentage by multiplying it by -100:

%R = Raw %R × -100

The result is a negative percentage bound by 0% and -100%.

How to trade with the Wm %R Indicator?

Williams %R gives three different trading signals: divergence; momentum swing failures; and overbought and oversold conditions.

Overbought and Oversold Conditions

Momentum oscillators, such as the Wm %R are renowned for indicating overbought and oversold conditions for the security being analyzed. For the Wm %R the -20 line and the -80 line represents the overbought and oversold thresholds respectively. Thus, when the Wm %R is above -20, the underlying security is generally considered overbought and when it is below -80, the underlying security is considered oversold. When the Wm %R moves down over the -20 line it signals that a drop in the price of the underlying security is probable and when the Wm %R moves up over the -80 line is indicates that there is a good probability that the price of the underlying security will increase. However, as the Wm %R is a leading indicator, these signals may be premature and are usually less reliable in a strong trend. In a strong trend these signals are a warning of impending change rather than entry signals. However, some traders prefer -10 and -90 as the reference lines for the overbought and oversold areas.

Overbought and oversold signals are more reliable when the price action of the security being analyzed is in a trading range. When the price action is in a strong uptrend, or a strong downtrend, the overbought and oversold signals are less reliable. Reliability can also be enhanced by tuning the overbought and oversold levels to the security being analyzed. For example, for a security that is more volatile, the overbought and oversold levels could be set at -10 and -90 respectively. Conversely, for a security that is less volatile, the overbought and oversold levels could be set at -30 and -70 respectively.

Momentum Failure Swings

The Wm %R usually moves from an oversold area to an overbought area and vice versa. A momentum failure swing occurs when the Wm %R moves from an overbought or oversold area but turns back before reaching the other area. When the Wm %R fails to reach the overbought area, it indicates a weakness in the uptrend and the probability that the trend will reverse. This would be a signal to close of any long positions; or a signal to sell short. Similarly, when the Wm %R fails to reach the oversold area, it indicates that the downtrend is weak and that it may reverse soon. This signals that you should cover any short positions or go long.

Divergence

Bearish divergence occurs when the price makes a higher high but the Wm %R makes a lower high. This indicates that there is a weakness in the uptrend and that a trend reversal is likely. A bullish divergence occurs when the price makes a lower low but the Wm %R makes a higher low. Here again, weakness in the trend is alluded to with a strong probability that the trend will reverse soon. Bearish divergence is more significant when the higher peak is in the overbought area (generally above -20) and the lower peak is below the overbought area. Similarly, the bullish divergence is more significant when the lower valley is in the oversold area (generally below -80) and the subsequent valley is above the oversold area.

Chart Example

The following chart shows a 14-period Wm %R in the lower chart panel on a 4-hour futures chart of the Dow Jones Industrial Index (DJI).

Advantages and Disadvantages of the Wm %R Indicator

Williams Percent Range Frequently Asked Questions

Yes, the Williams %R indicator can be used in all types of markets, including the ForEx market.

What does the Williams %R indicator measure?

The Williams %R indicator is a momentum indicator that used to measures momentum in order to identify overbought and oversold conditions.

Is the Williams %R indicator a stand-alone indicator?

No, the Williams %R indicator should not be used as a stand-alone indicator. Other technical indicators, or other technical analysis techniques, should be used to confirm the trading signals generated by the Williams %R indicator.

Is the Williams %R indicator a leading indicator?

Yes, the Williams %R indicator is a leading indicator, which means its trading signals may be generated a little prematurely.

Summary

The Williams Percent Range (Wm %R) indicator is a valuable leading momentum indicator that identifies overbought and oversold conditions, which also forewarn of potential reversals in price action. It is particularly effective for trading in range-bound markets and for short-term trading, while it is prone to generating false signals in trending markets. As a result, the %R is more effective when used as a part of a trading system than as a stand-alone indicator.