I was first introduced to his indicators, when I read his book “How I made a $1,000,000 Dollars Trading Commodities” which is which is a true trading classic and includes the %R indicator. The book is based on the tools Williams used, to win the 1987 World Cup Championship of Futures Trading. In this competition, he turned $10,000 to over $1,100,000 (11,376%) in a 12 months with real money. Ten years later his daughter Michelle won the same competition and obviously had some advice from her father!
Any serious trader should read and study Williams and in my view, he is one of the true great traders. His books are easy to understand, his logic is soundly based and he makes trading sound fun which it is!
Lets look at the %R indicator in more detail and how its application in your FX trading strategy, can enhance your profitability.
The Logic Behind %R
The indicator is so valuable because - it shows the relationship of the close relative to the high-low range over a set period of time. In terms of construction its very similar in concept to the stochastic indicator. The difference between the two indicators is - that Williams %R has upside down scale while on the other hand, the Stochastic Oscillator has internal smoothing in its calculation.
The calculation for Williams %R indicator
Williams %R = (HIGH(i-n)-CLOSE)/(HIGH(i-n)-LOW(i-n))*100
HIGH(i-n) is the highest high over a number (n) of previous periods and LOW(i-n) is the lowest low over a number (n) of previous periods.
Using the %R to Generate Trading Signals
Williams %R is considered to be a leading trading indicator which means that, the line of Williams %R gets to the top or bottom of the move before price gets there. Williams %R forms a peak and turns down before the currency price peaks and turns down and this divergence from price is very similar to the way traders use the stochastic indicator.
Williams %R is a momentum indicator and is usually used to spot overbought and oversold levels in non-trending markets. The value of William %R is static 0 to -100. Readings below 20 are considered to indicate overbought levels while on the other hand, readings above 80 are considered to indicate oversold levels. The usual time period for the indicator is 14-days.
The trading rules are very simple:
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, you should wait for the price to change direction before initiating trades.%R needs to be used in conjunction with other indicators and if you do incorporate it in your FX trading strategy, you will have a valuable trading indicator which can be used to enhance the profitability of your trading.
I am a big fan of Larry Williams, a larger than life trader who inspired me to trade and I hope you like his work too.