What is Williams% R?
Williams% R, also known as the Williams percentage range, is a type of momentum indicator that moves between 0 and -100 and measures overbought and oversold levels. The Williams% R can be used to find entry and exit points in the market. The indicator is very similar to the stochastic oscillator and is used in the same way. It was developed by Larry Williams and compares the closing price of a stock to the high-low range over a specific period, usually 14 days or periods.
- Williams% R moves between zero and -100.
- A reading above -20 is overbought.
- A reading below -80 is oversold.
- An overbought or oversold reading does not mean that the price will reverse. Overbought simply means that the price is near the highs of its recent range, and oversold means that the price is at the lower end of its recent range.
- It can be used to generate trade signals when the price and the indicator move out of the overbought or oversold territory.
The formula for Williams% R is:
Wiliams%R=Higher higher–Minimum MinimumHigher higher–ClosewhereHigher higher=Higher price in retracementperiod, normally 14 days.Close=Most recent closing price.Minimum Minimum=Lower price on the pullback
How to Calculate Williams% R
Williams% R is calculated based on price, generally over the last 14 periods.
- Record the maximum and minimum of each period for 14 periods.
- In period 14, consider the current price, the highest price, and the lowest price. It is now possible to complete all the variables in the formula for Williams% R.
- In period 15, write down the current price, the highest price, and the lowest price, but only for the last 14 periods (not the last 15). Calculate the new Williams% R value.
- As each period ends, calculate the new Williams% R, using only the last 14 periods of data.
What does Williams% R tell you?
The indicator tells the trader where the current price is in relation to the highest high during the last 14 periods (or the number of retracement periods to choose).
When the indicator is between -20 and zero, the price is overbought, or near the high of its recent price range. When the indicator is between -80 and -100 the price is oversold, or far from the high of its recent range.
During an uptrend, traders may watch the indicator move below -80. When the price starts to rise, Y the indicator moves above -80 again, it could indicate that the uptrend in price is starting again.
The same concept could be used to find short trades in a downtrend. When the indicator is above -20, watch for the price to start falling along with the Williams% R retreating below -20 to indicate a possible continuation of the downtrend.
Traders can also be on the lookout for momentum failures. During a strong uptrend, the price will often hit -20 or higher. If the indicator falls, and then cannot climb back above -20 before falling again, that indicates that the bullish price momentum is in trouble and a further decline in price could follow.
The same concept applies to a downtrend. Readings of -80 or lower are often achieved. When the indicator can no longer reach those lows before rising, it could indicate that the price is going to rise.
The difference between Williams% R and the fast stochastic oscillator
The Williams% R represents the closing level of a market against the highest high of the lookback period. In contrast, the fast stochastic oscillator, which moves between 0 and 100, illustrates the close of a market in relation to the lowest low. The Williams% R corrects for this by multiplying by -100. The Williams% R and the Fast Stochastic Oscillator end up being almost exactly the same indicator. The only difference between the two is how the indicators are scaled.
Limitations of using Williams% R
Overbought and oversold readings on the indicator do not mean that a reversal will occur. Overbought readings actually help confirm an uptrend, as a strong uptrend should see prices that are pushing or breaking past highs (which the indicator is calculating).
The indicator can also be overly responsive, which means it gives a lot of false signals. For example, the indicator may be in oversold territory and start to rise, but the price does not. This is because the indicator only looks at the last 14 periods. As periods go by, the current price relative to the highs and lows of the lookback period changes, even if the price hasn’t actually moved.