Williams %R

Description

Williams %R Strategy is based on reversal prospect indicator wrought by L.R. Williams. The basic idea standing beyond this indicator is to point if some security is overbought or oversold.

Indicator is calculated basing on transaction prices from some overwatched Period. Length of a Period can be adjusted to day trading or longer term strategies. Shorter Period effects with more rapid, but sometimes less reliable indicator changes.

Basic equation of the indicator is:

$%R = \frac{Max~period~price - Current~price}{Max~period~price - Min~period~price} \cdot (-100)$

General information obtained from it is a security current value ratio to the highest one in overwatched period. Indicator’s value falls within $[-100, 0]$ . When strategy has no opened positions, value falls into one of margins established by Margin_open and then leaves it – that is a signal to open proper positions:

$\%R$ leaves $[-100, -100 + Margin_{open}] \rightarrow$ algorithm opens long position, security is oversold.
$\%R$ leaves $[-Margin_{open}, 0] \rightarrow$ algorithm opens short position, security is overbought.

Algorithm closes its position when the %R indicator crosses -100 + Margin_close or Margin_close. Also, there exists wide range of emergency brakes that may close position to prevent strategy’s loss. More elaborated version of this strategy can make position open/close signals and volumes dependent on further indicators and market conditions. To decrease number of false signals – price trend filters and more elaborated algorithms can be used.

Originally postponed Margin_open value, beyond which reversal of security trend is going to occur, is equal to 20% of indicator value range. Margin_close usually varies from 30% up, depending on accepted risk and expected profit.

Market Data

Last trade
Order book (1st level)

Parameters

PARAMETER NAME	DESCRIPTION	ESSENTIAL
Margin_open	Margin of critical indicator value, beyond which strategy starts trading (%)	Yes
Margin_close	Margin of indicator value, which cross is signal to close opened positions (%)	Yes
Period Length	Length of an overwatched Period	Yes
Order Volume	Volume of single opened position	Yes

Conditions

Open position

Side Buy or Sell
Amount Order Volume
Price Last market price
Type Price limit

When Williams %R indicator value leaves one of margins set up either by -100 + Margin_open or Margin_open.

Close position

When strategy has any opened positions and Williams %R indicator crosses -100 + Margin_close or Margin_close. Also, a protection close might invoked by watchdog detecting potential loss.

Termination

There is no strategy termination condition.

Time frame

Strategy bases on some initial Period of data collection without trading and is designed to enable adjusting both: period of data collection and its trading time span from hours to whole weeks.

Further information & source

A complete guide to Algorithmic Trading