Williams %R, sometimes referred to as the Williams Percent Range, is a momentum indicator that measures overbought and oversold levels, comparable to a stochastic oscillator. The Williams %R is used to establish entry and exit points in the market. It compares the close of a stock to the high-low range over a period of time, typically 14 days.
The Williams %R, often shortened to simply %R, is a technical analysis oscillator. This indicator shows the present closing level of a commodity or stock in relation to the high and the low over a given number of days. This analytical tool was developed by Larry Williams, a publisher and a promoter of trading materials.
The equation used to calculate the Williams %R looks like this:
%R = (Highest High – Closing Price) / (Highest High – Lowest Low) x -100
The first task a trader, investor or analyst must complete for this equation to make sense is to determine the look-back period; the highest high and lowest low applies to the specified period of time that is chosen. From this, traders and analysts are able to determine if a stock or commodities market is trading near the high or the low, or somewhere in the middle, of its most recent trading range.
The Williams %R is a popular indicator because of its remarkable ability to signal a market reversal at least one to two periods in the future. Traders, specifically, depend upon the Williams %R to not only anticipate market reversals, but also to determine overbought and oversold market conditions.
The Williams %R is the inverse of the Fast Stochastic Oscillator. The Williams %R reflects the level of a market’s close in relation to the highest high for the look-back period, while the Fast Stochastic Oscillator reflects the level of a market’s close in relation to the lowest low for the look-back period. The Williams %R corrects for the inversion by taking the raw value it generates and multiplying it by -100. For this reason, both the Williams %R and the Fast Stochastic Oscillator produce the exact same lines, with the scaling of the lines being the only difference.
The Williams %R oscillates from 0 to -100. When the indicator produces readings from 0 to -20, this indicates overbought market conditions. When readings are -80 to -100, it indicates oversold market conditions.