Developed by Larry Williams, Williams%R is a momentum indicator used to indicate overbought and oversold levels.
Overbought market conditions are found at the upper band (readings from 0 to -20) and oversold conditions at the lower band (readings from -80 to -100).
Interpretation
The interpretation is similar to the Stochastic Oscillator, except that Williams %R ranging scale is plotted using negative values from 0 to -100.
0 to -20 readings are considered overbought; -80 to -100 readings are considered oversold.
Formula
%R= -100x[(Highest High - Current Close)/( Highest High - Lowest Low)]
Popular trading signals from Williams%R
I. In trending markets
Take only signals from Williams%R in the main direction of the trend. If the main trend is up, take only oversold signals from Williams%R. Conversely, if the main trend is down, take only overbought signals from Williams%R.
Some currency traders identify the currency pair's long-term trend and then use extreme readings for entry points. If the mid long-term trend is bearish for a currency pair, then overbought readings could mark potential entry points to go SHORT (again).
II. In ranging markets
Go long when Williams %R falls below the oversold level and rises back above
Go short when Williams %R rises above the overbought level and falls back below.
It is recommended to use Williams%R in conjunction with other technical analysis tools to make a complete forex trading system.
