Williams % R indicator Explained

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Williams %R Definition and Uses

What is Williams %R?

Williams %R, also known as the Williams Percent Range, is a type of momentum indicator that moves between 0 and -100 and measures overbought and oversold levels. The Williams %R may 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 it compares a stock’s closing price to the high-low range over a specific period, typically 14 days or periods.

Key Takeaways

  • Williams %R moves between zero and -100.
  • A reading above -20 is overbought.
  • A reading below -80 is oversold.
  • An overbought or oversold reading doesn’t mean the price will reverse. Overbought simply means the price is near the highs of its recent range, and oversold means the price is in the lower end of its recent range.
  • Can be used to generate trade signals when the price and the indicator move out of overbought or oversold territory.

The Formula for the Williams %R Is:

How to Calculate the Williams %R

The Williams %R is calculated based on price, typically over the last 14 periods.

  1. Record the high and low for each period over 14 periods.
  2. On the 14th period, note the current price, the highest price, and lowest price. It is now possible to fill in all the formula variables for Williams %R.
  3. On the 15th period, note the current price, highest price, and lowest price, but only for the last 14 periods (not the last 15). Compute the new Williams %R value.
  4. As each period ends compute the new Williams %R, only using the last 14 periods of data.

What Does Williams %R Tell You?

The indicator is telling a trader where the current price is relative to the highest high over the last 14 periods (or whatever number of lookback periods is chosen).

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 can watch for the indicator to move below -80. When the price starts moving up, and the indicator moves back above -80, it could signal 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 moving back below -20 to signal a potential continuation of the downtrend.

Traders can also watch for momentum failures. During a strong uptrend, the price will often reach -20 or above. If the indicator falls, and then can’t get back above -20 before falling again, that signals that the upward price momentum is in trouble and a bigger price decline could follow.

The same concept applies to a downtrend. Readings of -80 or lower are often reached. When the indicator can no longer reach those low levels before moving higher it could indicate the price is going to head higher.

The Difference Between Williams %R and the Fast Stochastic Oscillator

The Williams %R represents a market’s closing level versus the highest high for the lookback period. Conversely, the Fast Stochastic Oscillator, which moves between 0 and 100, illustrates a market’s close 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 the exact same indicator. The only difference between the two is how the indicators are scaled.

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Limitations of Using the Williams %R

Overbought and oversold readings on the indicator don’t mean a reversal will occur. Overbought readings actually help confirm an uptrend, since a strong uptrend should regularly see prices that are pushing to or past prior highs (what the indicator is calculating).

The indicator can also be too responsive, meaning it gives many false signals. For example, the indicator may be in oversold territory and starts to move higher, but the price fails to do so. This is because the indicator is only looking at the last 14 periods. As periods go by, the current price relative to the highs and lows in the lookback period changes, even if the price hasn’t really moved.

Williams %R

Table of Contents

Williams %R

Introduction

Developed by Larry Williams, Williams %R is a momentum indicator that is the inverse of the Fast Stochastic Oscillator. Also referred to as %R, Williams %R reflects the level of the close relative to the highest high for the look-back period. In contrast, the Stochastic Oscillator reflects the level of the close relative to the lowest low. %R corrects for the inversion by multiplying the raw value by -100. As a result, the Fast Stochastic Oscillator and Williams %R produce the exact same lines, but with different scaling. Williams %R oscillates from 0 to -100; readings from 0 to -20 are considered overbought, while readings from -80 to -100 are considered oversold. Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable to Williams %R.

Calculation

The default setting for Williams %R is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %R would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods.

Interpretation

As with the Stochastic Oscillator, Williams %R reflects the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10 (110 – 100), which is the denominator in the %R formula. The highest high less the close equals 2 (110 – 108), which in turn is divided by 10, resulting in 0.20. Multiply this number by -100 to get -20 for %R. If the close was 103, Williams %R would be -70 (((110-103)/10) x -100).

The centerline, -50, is an important level to watch. Williams %R moves between 0 and -100, which makes -50 the midpoint. Think of it as the 50-yard line in football. The offense has a higher chance of scoring when it crosses the 50-yard line. The defense has an edge as long as it prevents the offense from crossing the 50-yard line. A Williams %R cross above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period. This suggests that the cup is half empty.

Low readings (below -80) indicate that price is near its low for the given time period. High readings (above -20) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. Williams %R equals -9 when the close was at the top of the range. The Williams %R equals -87 when the close was near the bottom of the range. The close equals -43 when the close was in the middle of the range.

Overbought/Oversold

As a bound oscillator, Williams %R makes it easy to identify overbought and oversold levels. The oscillator ranges from 0 to -100. No matter how fast a security advances or declines, Williams %R will always fluctuate within this range. Traditional settings use -20 as the overbought threshold and -80 as the oversold threshold. These levels can be adjusted to suit analytical needs and security characteristics. Readings above -20 for the 14-day Williams %R would indicate that the underlying security was trading near the top of its 14-day high-low range. Readings below -80 occur when a security is trading at the low end of its high-low range.

Before looking at some chart examples, it is important to note that overbought readings are not necessarily bearish. Securities can become overbought and remain overbought during a strong uptrend. Closing levels that are consistently near the top of the range indicate sustained buying pressure. In a similar vein, oversold readings are not necessarily bullish. Securities can also become oversold and remain oversold during a strong downtrend. Closing levels consistently near the bottom of the range indicate sustained selling pressure.

Chart 3 shows Arch Coal (ACI) with 14-day Williams %R hitting overbought and oversold levels on a regular basis. The red dotted lines mark a move below -50 that occurs after an overbought reading. The green dotted lines mark a move above -50 that occurs after an oversold reading. As noted above, overbought is not necessarily bearish and oversold is not necessarily bullish. Top and bottom pickers can act when overbought or oversold, but it is often prudent to wait for a confirmation move. A move below -50 confirms a downturn after an overbought reading. A move above -50 confirms an upturn after an oversold reading.

Momentum Failure

The failure to move back into overbought or oversold territory signals a change in momentum that can foreshadow a significant price move. The ability to consistently move above -20 is a show of strength. After all, it takes buying pressure to push %R into overbought territory. Once a security shows strength by pushing into overbought territory more than once, a subsequent failure to exceed this level shows weakening momentum that can foreshadow a decline.

The chart above shows Cisco with 14-day %R. The stock was strong, with numerous overbought readings occurring from February to April. Even after the plunge below -80 in early April, %R surged back above -20 to show continuing strength. After a few more weeks of overbought readings, %R plunged to oversold levels in early May. This deep plunge showed strong selling pressure. The subsequent recovery fell short of -20 and did not reach overbought territory. This provided the second sign of weakness. After failing below -20, the decline below -50 signaled a downturn in momentum and the stock declined rather sharply. Another failure just below -20 in mid-June also resulted in a sharp decline.

The chart above shows TJX Companies (TJX) with 28-day Williams %R. Chartists can adjust the look-back period to suit their analysis objectives. A longer timeframe makes the indicator less sensitive. After becoming overbought in October, the indicator moved lower and became oversold twice in December. The January surge carried %R into overbought territory and the stock broke channel resistance. These were promising signs. On the subsequent pullback, %R held above -80 and did not become oversold. This showed underlying strength. The subsequent move above -50 foreshadowed a sharp advance over the next few months.

Conclusion

Williams %R is a momentum oscillator that measures the level of the close relative to the high-low range over a given period of time. In addition to the signals mentioned above, chartists can use %R to gauge the six-month trend for a security. 125-day %R covers around 6 months. Prices are above their 6-month average when %R is above -50, which is consistent with an uptrend. Readings below -50 are consistent with a downtrend. In this regard, %R can be used to help define the bigger trend (six months). Like all technical indicators, it is important to use the Williams %R in conjunction with other technical analysis tools. Volume, chart patterns and breakouts can be used to confirm or refute signals produced by Williams %R.

Using with SharpCharts

Williams %R is available as an indicator for SharpCharts. The default setting is 14, but users can opt for a shorter or longer timeframe to produce a more or less sensitive oscillator, respectively. Once selected, the indicator can be placed above, below or behind the underlying price plot. Click on “Advanced Options” to add a moving average, horizontal line or another indicator. A 3-day SMA can be added as a signal line. Click here for a live example.

Suggested Scans

Williams %R Turns Up from Oversold Levels

This scan searches for stocks that are trading above their 200-day moving average to define a long-term uptrend. A pullback is identified when %R moves below -80 and a subsequent upturn occurs when %R moves above -50.

Williams %R Turns Down from Overbought Levels

This scan searches for stocks that are trading below their 200-day moving average to define a long-term downtrend. An oversold bounce is identified when %R moves above -20 and a subsequent downturn occurs when %R moves below -50.

For more details on the syntax to use for Williams %R scans, please see our Scanning Indicator Reference in the Support Center.

Further Study

John Murphy’s Technical Analysis of the Financial Markets has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons, along with some examples specific to the %R and the Stochastic Oscillator.

Martin Pring’s Technical Analysis Explained illustrates the basics of momentum indicators by covering divergences, crossovers, and other signals. There are two more chapters covering specific momentum indicators, each containing plenty of examples.

The Williams Percent Range Explained – What is the “%R” Indicator?

The “Williams Percent Range”, or “%R”, indicator is a popular member of the “Oscillator” family of technical indicators. Larry Williams created the %R oscillator along the same lines as the Stochastics indicator, but without the “smoothing” component and with a reversed scale. The Williams Percent Range indicator is uncanny in its ability to signal a reversal one or two periods ahead of reality. Traders use the indicator to determine overbought and oversold conditions and reversals in market trends.

The Williams Percent Range indicator is classified as an “oscillator” since the values fluctuate between zero and “-100”. The indicator chart typically has lines drawn at both the “-20” and “-80” values as warning signals. Values between “-80” and “-100” are interpreted as a strong oversold condition, or “selling” signal, and between “-20” and “0.0”, as a strong overbought condition, or “buying” signal.

Williams Percent Range Formula

The Williams Percent Range indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:

  1. Choose a period “N” for “%R” (Standard is “14”);
  2. %R = 100 * (HN – CCP)/(HN – LN) where CCP = Current Closing Price, LN = lowest low of past “N” periods, HN = highest high of past “N” periods;

Software programs perform the necessary computational work and produce a Williams Percent Range indicator as displayed by the “Blue” line in the chart below:

The Williams Percent Range indicator is composed of a single fluctuating curve. Traders will occasionally add a Smoothed Moving Average, as above in “Red”, to enhance the value of the trading signals. In the example above, the “Blue” line is the Williams Percent Range, while the “Red” line represents a “SMA” for “14” periods. The Williams Percent Range is viewed as a “leading” indicator, in that its signals foretell that a change in trend is imminent. The weakness in the indicator is that timing is not necessarily a product of the %R oscillator, the reason for attaching a “lagging” moving average to confirm the Williams Percent Range signal.

Forex traders favor the Williams Percent Range indicator because of its ability to foretell reversals one to two periods ahead of time. As with any oscillator, one should wait until actual pricing behavior confirms the reversal.

The next article in this series on the Williams Percent Range indicator will discuss how this oscillator is used in forex trading and how to read the various graphical signals that are generated.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.

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