Percent R | Simplexity Analytics

Williams %R

otherwise known as:

% R or Percent Range

The %R indicator is a great indicator because it is simple yet effective. But, there is a lot of misinformation out there about how it is best put into use. Our objective here is to provide you with the most up to date and proper use of this great indicator.

%R is a momentum oscillator that helps traders identify overbought and oversold conditions in the market. Developed by Larry Williams, this indicator has proven to be valuable for traders of all levels in predicting potential reversals and entry/exit points. This is a very popular tool that already comes pre-installed on many trading platforms. The problem however, is that the default settings or even the calculation they use is often out of date.

%R will range between 0-100. Results above 75 are considered overbought and under 25 is considered oversold. In the outdated versions you will see a range from -100 to 0 and overbought/oversold areas at 80/20. Or, you may even see the overbought and oversold areas inverted. The default lookback period is usually set to 14. This is outdated as well as a number of years ago, Larry started using a 4 period lookback instead of 14 due to increased market volatility and to produce more trading signals on a daily time period.

Here is the formula that is often used to calculate %R:

%R = (Highest High - Close) / (Highest High - Lowest Low) * (-100)

Where:

Highest High: The highest price reached during the chosen period.
Lowest Low: The lowest price reached during the chosen period.
Close: The closing price of the current period.

Here is an example of %R on a daily chart of ES from www.barchart.com:

You can see how the overbought/oversold setting is at 80/20 and the range of values is between -100 to 0. This is NOT how Larry currently sets up his %R.

Here is the formula that Simplexity Analytics uses to calculate %R using Easy language for Tradestation:

%R=(((Close - Lowest(low,length)) / difference) * 100)

Where:

Length: The number of periods to look back.
Difference: The highest high of the length minus the lowest low of the length.

Does this sound confusing? Let's simplify it into simple terms.

%R returns a value of where the close is in relation to the range of the look back period.

Here is an example using a 4 day %R.

Day 1 had a low of 0 and a high of 20

Day 2 had a low of 10 and a high of 30

Day 3 had a low of 20 and a high of 40

Day 4 had a low of 30 and a high of 50

Therefore, the lowest low of these 4 days is 0 on day 1.

The highest high of these 4 days is 50 on day 4.

The range of these 4 days is 50. (0+50)

If the close on day 4 was 40, then %R would be 80% because 40 is 80% of the range from 0-50. 80% is considered overbought since it is greater than 75.

Here is the calculation:

%R=(((Close - Lowest(low,length)) / difference) * 100)

%R=(((40 - 0)) / 50) * 100)

%R=(40 / 50) * 100)

%R=(.8) * 100)

%R=80

Now that you know what %R is and how it works, you should also know that it works on any time period. It can be used from seconds to minutes to days, weeks and months.

Below is a chart of Soybeans from 2023 with a 14 day %R illustrated at the bottom.

The overbought (>75) area is indicated above the red horizontal line and the oversold (<25) area is below the green horizontal line. Simply put, we look to buy when the market is oversold and sell when it is overbought.

Below is the same chart but we added a second %R indicator with a 4 day lookback in blue.

The 4 day %R produces many more overbought and oversold areas but with that comes a lot more false signals. How can we eliminate more false signals and keep the good ones?

The answer is to only take the signals that are in phase with momentum.

Below is a chart of %R4 and %R14 with our Simtrend added to determine whether momentum is up, down or neutral. Also, it is beneficial to determine how strong the up or down momentum is. Buy (oversold) signals only apply when momentum is up. Short (overbought) signals only apply when momentum is down.

By only looking at signals in phase with momentum, we have reduced the number of signals down to 9 possible areas on this chart.

#1 occurs right after SimTrend turned red indicating the start of a strong down turn in momentum.

#2 occurs while ST is red but the market ends up rallying. No lows were broken and we would not have initiated a short position here.

#3, #4 and #5 occur during strong downward momentum.

#6 occurs as the signal line rises above the SimTrend line and momentum begins to turn up. No short entry here either.

#7, #8 and #9 occur with a strong upward momentum.

Below are some examples of this setup from various markets.

Below is a chart of ES with a 9 day moving average added to the price chart with a blue line. A moving average can be another way of gauging the trend or momentum. A 9 day moving average is used but many other time frames work as well. The longer the time frame, the more smoothed out your line will be.

%R is a nice indicator and one that we employ daily at Simplexity Analytics. It is not foolproof nor is it a stand alone indicator. %R is best used in conjunction with other tools like a momentum or trend affirming indicator. This is an indicator that requires some patience as %R signals with momentum take some time to develop.

Also, some markets are better than others when using this strategy. We've done extensive testing and found that the energy and grain markets tend to work very well while meats and metals don't do quite as well.