Percent R

This indicator was developed by Larry Williams, a trader and author of note, who has published numerous works on trading using technical indicators.

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

High p = highest price recorded for period p
Close p = close for period p
Low p = Low for the period p
p is the length of the period
As a new bar comes into the calculation, the first bar is dropped.

Originally Larry used a 10 day trading range and then examined where the market closed, relative to that range. The study appears to reflect an overbought or oversold condition of the market. A close toward the higher side of the range indicates an overbought condition and toward the lower side, an oversold condition.

The underlying premise is that rising markets close toward the higher end of the range and falling markets toward the lower end of the range. Often markets close at the higher extreme when they top and conversely close at the lower extreme when they bottom. The signal is actually generated when the market backs away from that extreme close.

The period variable can be tuned to reflect your own optimum time frame. Obviously the shorter the period the more volatile the indicator, whereas a longer term time frame will result in a smoother indicator line. In the example below a period of 10 bars was used. The indicator is bound by the limits 0 and 100.

© Copyright 2003 CQG, Inc. All rights reserved worldwide

In the example above the last value posted for the indicator was 41.7 and that was computed by examining the range of the last ten periods relative to the close of the period. Note the current bar is not used until the close has been posted. The second previous bar closed at its low, which was the low for the last 10 periods and that recorded a value of 0%.

%R = (3218-3213) / 3225-3213) *100
       = 5 / 12 *100
       + 41.7%

There are two horizontal lines overlayed on the indicator at 10% and 90%, which represent oversold and overbought levels. A move below the blue dotted line, by the indicator, will generate a buy signal, which is then confirmed when the indicator moves back above the blue line. Conversely, a sell signal is generated when the indicator moves above the red dotted line and is once again confirmed when the indicator drops back below the red dotted line. 

Disclaimer
© The MacLean Group Pty Ltd ACN 096 967 038. All rights reserved 2003. This article has been prepared by The MacLean Group and licensed to ASX. The views are those of the author and not of ASX. This material is educational and it is not intended to constitute financial advice.