Introduction
Larry Williams originally used a ten-day period, and plotted where the
current price was compared to that period. He used it to measure
conditions of overbought and oversold; the overbought region is the area
below 20% and the oversold region is the area above 80%. With the
ability to invert the values it can be looked at in the same manner as
other overbought/oversold indicators. Note: We will use the traditional
method, not the inverted, in our discussions. Choosing the time period
which the indicator looks at the interval is crucial to finding the
optimal sensitivity.
Interpretation
Williams's basic rule is simple. When the %R is lower than 20% and
becomes greater than 20% it is interpreted as a buy signal. Conversely,
when the %R is higher than 80% and becomes lower than 80% a sell signal
is activated.
Changing the sensitivity of the indicator to work for you is essential
to making the study a better tool. The longer the period for the %R, the
less sensitive it will be. The indicator will move less but will be more
smoothed. A number of technical traders use a value that is less
volatile, or in other words, a larger value. Many traders find it better
to use a strategy where the market leaves the areas of overbought/
oversold before entering a trade position. In either case, using solid
exit strategies is important with this indicator.
Example of the %R in the Indicator Window:
Calculation
Parameters:
Period (10) - The number of price bars, or the interval, used to
calculate the study.
Formula:
You must first determine the highest high and lowest low for the length
of the interval. This is the trading range for the specified interval.
The general formula for the %R is as follows:
%Rt = ( (Highn - Closet) / (Highn - Lown) ) * -100
%Rt: The percent of the range for the current period.
Highn: The highest price during the past n trading periods.
Closet: The closing price for the current period.
Lown: The lowest price during the past n trading periods.
n: The length of the interval.
Example: Assume the market is Treasury Bills. The high for the past ten
trading intervals is 9275, and the low is 9125. The closing price in the
current period is 9267. If you substitute those values in the equation,
this is what you get:
%R = ( (9275 - 9267) / (9275 - 9125) ) * 100
= (8 / 150) * 100
= 5.33 Updated Formula:%Rt = ( (Closet - Lown) / (Highn - Lown) ) * -100
Customizing
To change the settings of this indicator, open the Program Options
screen by clicking the "Program Options" button located on the main
Toolbar.
See the Program Options section for more details.
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