How to Use the RSI and Williams Percent Range

October 19th, 2009 Posted in Chief Analyst Special Report, FAQ, FX Education

Name: Greg Holden

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With so many tools at your disposal on ForexYard’s trading platform it can sometimes be a daunting task when trying to pick the right one, or combination thereof. A discussion of how to use 2 such tools which operate in a similar manner will therefore be discussed herein.

The 2 tools explained in this article are the Relative Strength Index, or RSI, and the Williams Percent Range. These two indicators operate in a very similar way by informing the trader when a currency pair or commodity is over-sold or over-bought and experiencing corrective pressure.

The chart below shows the RSI in action on the USD/JPY currency pair on a 1-hour time scale.

RSI - USDJPY

The Relative Strength Index (RSI) is known as an oscillator since it follows along with the price of the pair but in a separate area on the chart. It has 2 lines running through it at the 30 and 70 mark located at the right side of the oscillator (circled in red). The area above the 70 line (marked by the number 1) is known as the “over-bought territory.” The area below the 30 line (marked by the number 2) is similarly known as the “over-sold territory.”

Whenever the line inside the RSI goes above or below these lines, the price is known to be floating in the over-bought/sold territory and is therefore experiencing pressure in the opposite direction. As you can see in the chart above, whenever the price went above the 70 line the corresponding price movement shortly after was typically in a downward direction. Likewise, whenever the RSI line went below the 30 line the corresponding movement immediately after was typically in an upward direction.

The RSI does not guarantee that the price will move in an opposite direction. It is known as a leading indicator of price behavior which means it gives a reading of over-bought or over-sold, suggesting a correction will occur, but the correction usually only occurs a short while thereafter, and the move may not be very large but rather a small fluctuation within a trend. This must therefore be taken into consideration with other tools such as the Stochastic (slow) or MACD.

The Williams Percent Range is the second indicator being described here. This is an oscillator which indicates when an asset is being over-bought or over-sold as well, just in a slightly different way.

williams percent range

As indicated in the chart above, the Williams Percent Range also has an over-bought and over-sold territory, but they are not marked on the oscillator itself. The trader must be made aware that these zones fall within the area above the -20% level and below the -80% level, respectively. The lines have been partially drawn on the chart above to make understanding this slightly easier.

As with the RSI, when the price is above the -20% line the asset is being over-bought. When it is below the -80% line it is being over-sold. This indicator does offer something unique, however. When the price reaches the farthest it can go in one direction – meaning when it reaches 0% or -100% – then it has nowhere else to go but the opposite direction. You can see that each time the peaks were hit, the price reacted by moving in the opposite direction shortly afterwards.

This is how you can take advantage of these 2 tools on your trading platform. If you haven’t done so already, open up your very own FREE Demo Account with ForexYard and see for yourself how easy forex trading can be.