Technical Analysis

The Percent “R” Indicator: How to Make it Work for You

The Percent Range (%R) technical indicator was developed by renowned futures author and trader Larry Williams. This system attempts to measure overbought and oversold market conditions. The %R always falls between a value of 100 and 0. There are two horizontal lines in the study that represent the 20% and 80% overbought and oversold levels.

In his original work, Williams’ method focused on 10 trading days to determine a market’s trading range. Once the 10-day trading range was determined, he calculated where the current day?s closing price fell within that range.

The %R study is similar to the Stochastic indicator, except that the Stochastic has internal smoothing and that the %R is plotted on an upside-down scale, with 0 at the top and 100 at the bottom. The %R oscillates between 0 and 100%. A value of 0% shows that the closing price is the same as the period high. Conversely, a value of 100% shows that the closing price is identical to the period low.

The Williams %R indicator is designed to show the difference between the period high and today’s closing price with the trading range of the specified period. The indicator therefore shows the relative situation of the closing price within the observation period.

Williams %R values are reversed from other studies, especially if you use the Relative Strength Index (RSI) as a trading tool. The %R works best in trending markets. Likewise, it is not uncommon for divergence to occur between the %R and the market. It is just another hint of the market?s condition.

On specifying the length of the interval for the Williams %R study, some technicians prefer to use a value that corresponds to one-half of the normal cycle length. If you specify a small value for the length of the trading range, the study is quite volatile. Conversely, a large value smoothes the %R, and it generates fewer trading signals. Some computer trading programs use a default period of 14 bars. Importantly, if an overbought/oversold indicator, such as Stochastics or Williams %R, shows an overbought level, the best action is to wait for price to turn down before selling.

Selling just because the price seems to be overbought (or buying just because it is oversold) may take a trader out of the particular market long before the price falls (or rises), because overbought/oversold indicators can remain in an overbought/oversold condition for a long time–even though the contract?s prices continue to rise or fall. Therefore, one may want to use another technical indicator in conjunction with the %R, such as the Moving Average Convergence Divergence (MACD).

The trading rules are simple. You sell when %R reaches 20% or lower (the market is overbought) and buy when it reaches 80% or higher (the market is oversold). However, as with all overbought/oversold indicators, it is wise to wait for the indicator price to change direction before initiating any trade.

Larry Williams defines the following trading rules for his %R: Buy when %R reaches 100%, and five trading days have passed since 100% was last reached, and after which the %R again falls below 85/95%. Sell when %R reaches 0%, and five trading days have passed since 0% was last reached, and after which the Williams %R again rises to about 15/5%.

Like most other "secondary" tools in my Trading Toolbox, I use the Williams %R indicator in conjunction with other technical indicators — and not as a "primary" trading tool or as a stand-alone trading system.

More information on the Williams %R indicator can be obtained from Williams’ book: "How I Made $1,000,000 Last Year by Trading Commodities." It’s published by Windsor Books, New York.

Jim Wyckoff is the editor of the "Jim Wyckoff on the Markets" analytical, educational and trading advisory service. He is also a technical analyst for Dow Jones Newswires, and was formerly the head equities analyst at CapitalistEdge.com.Jim has spent over 20 years involved with the stock, financial and commodity futures markets. He was a financial journalist with the FWN newswire service for many years, including stints as a reporter on the rough-and-tumble commodity futures trading floors in Chicago and New York. As a journalist, Jim covered every futures market traded in the U.S., at one time or another. It didn't him long to realize the successful traders in every market-be it pork bellies, Treasury bonds or stock index futures-had a common thread among them: nearly all relied on technical analysis to give them a trading edge.Not long after Jim started his career in financial journalism, he began studying technical analysis and found it fascinating. By studying chart patterns and other technical indicators, he realized the playing field could be leveled between the "professional insiders" in the markets. His work has been focused on achieving that end ever since.Jim considers himself a "straight-shooter" in the challenging endeavor of futures trading. Like achieving success in any profession, being a successful trader requires hard work, experience and continuing education. There are no short-cuts to easy money. And, Jim promises and provides excellent customer service, including picking up the telephone, himself, when his valued customers ring him.  Feel free to give him a call at +1-319-277-8643

Jim Wyckoff is the editor of the "Jim Wyckoff on the Markets" analytical, educational and trading advisory service. He is also a technical a...

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