The Williams %R oscillator and relative strength index (RSI) are momentum indicators, but they differ in their calculation and interpretations. Though both are range-bound metrics, the RSI moves between 0 and 100 while Williams %R fluctuates between 0 and -100. In fact, Williams %R has more in common with the stochastic oscillator, as both measure closing price against the total trading range for a given period.
Williams %R compares the most recent closing price to the highest high of a specified look-back period. This means that a %R above -50 indicates the most recent closing price is nearer to the period high than it is to the low. A %R of -100 means the current price is the lowest low for the specified look-back period. A 14-session period is typically used, though this can be 14 days, weeks or hours and can be adjusted to meet the needs of the individual investor.
RSI measures the consistency with which prices increase or decrease over time, so a high RSI reading indicates that prices have increased with greater frequency than they have declined over a particular time frame. RSI also uses a baseline 14-session look-back period. Therefore, an RSI reading of 100 means the closing price has increased every day for the past 14 days.
Both the Williams %R and RSI are used to determine if a security is overbought or oversold. These conditions are a signal that the current trend may be exhausting itself. In addition, investors use both of these momentum metrics to pinpoint potential reversals by analyzing divergence between momentum readings and price action.
If the Williams %R decreases while price continues to hit new highs in a bullish trend, a bearish reversal is likely just around the bend. However, because of their different ranges, overbought or oversold signals from these momentum oscillators are reversed. Overbought conditions are signaled by RSI readings over 80 and %R readings between -20 and 0. Oversold conditions are signaled by RSI readings below 20 and %R readings between -80 and -100.