Williams' Percent Range - indicator

Master class: trading strategies in practice - strategy 5

In the handbook to Metatrader In the description of the indicator Williams' Percent Range (Williams' %R) I found an interesting phrase. Quote: "The Williams' Percent Range indicator has curious ability by the mysterious thus preempt price reversals. It almost always forms a peak and turns down a certain amount of time before price peaks and turns down. Similarly, the Williams Percent Range usually forms a trough and turns up ahead of time." End of quote!

After her there was a desire to understand how this "curious ability" got into the simple mathematical formula of the indicator:

%R = (MAX (HIGH (i - n)) - CLOSE (i)) / (MAX (HIGH (i - n)) - MIN (LOW (i - n))) * 100

and "mysteriously" gives signals to enter in advance (and whether all of them are valid). Here are some examples of how W%R reverses BEFORE the price does.

 

Figure 1. An example of the Williams' Percent Range indicator.

Let's take a look at how to build indicator. From the logic of its construction you will understand why the indicator sometimes unfolds before the price, and sometimes gives very good signals for entry. Also, you will understand in which cases the signal can be used, and in which it is better to ignore. Also you will understand the essence of "sticking" of the indicator in one of the zones: overbought and oversold. In addition, it will become clear about these zones, what the -20 and -80 levels are better or worse than the others.

The Secret of Williams' Percent Range

So, W%R is most often used with the standard parameter 14. We are

that the maximum of 14 values will be equal to "0" level in the indicator window. And the lowest low will give the "-100" level in the indicator window.

The indicator itself only shows the ratio of the last price (closing) to the current (!) highest high and lowest low for the last 14 candlesincluding the current one.

Fig. 2. How the Williams' Percent Range indicator works.

After the closing of the last candle the formula of the indicator fixes this closing price in the indicator window and goes to a new one. Since the opening of a new candle it is important to understand that the new (!) maximum high and minimum low can work for it, i.e. the same "0" and "-100" in the indicator window remain the same, but in the price chart they are already other values.

Fig. 3. Shift of the 14-candle window during the formation of a new candle.

We see in real time, how the old low "dropped out" of the formula, and 1.6590 became a new "-100" for the indicator. I.e. in the "window" of 14 candles the highest high and the lowest low can "act" only during 14 new periods.

Fig. 4. A real example of how the indicator works.

Going back to the question about the "curious ability to anticipate price reversals"... Now it is clear that the price, having made a new low and closed (exactly closed!) above it, will give the indicator a reason to reverse, because the previous closing price distance to the previous valid "-100" will be less than the distance from the current closing price to the current valid (updated) minimum "-100". Let's look at Figure 4 and do not wonder anymore the amazing properties of Williams' Percent Range.