Description: Williams %R is a momentum oscillator developed by Larry Williams. The indicator uses an inverse function of the fast Stochastic Oscillator in its calculation. While readings in the range of -80 to -100 are interpreted as oversold, readings in the range of 0 to -20 are interpreted to be overbought. The basic purpose of the indicator is to compare the current price of a security with the highest high value over a specific period of time. The oscillator is a bounded one and oscillates within a range of 0 to -100. Notably, the Williams %R and Fast Stochastic Oscillator look exactly the same when plotted on a chart with the scaling being the only differentiating factor between the two. The default setting for the Williams %R uses 14 periods in its calculation.
Williams %R Calculation
Williams %R is calculated in a very similar manner as the Stochastic Oscillator. The formula for the same is as follows:
Williams %R = (Highest High – Current Close / Highest High – Lowest Low) x (-100)
Williams %R Interpretations
Overbought and Oversold: A reading above -20 on the oscillator is considered as overbought while a reading below -80 on the Williams %R is considered as oversold. In other words, a reading above -20 indicates that the security is trading at the top end of the high low range over the last 14 periods. Similarly, a reading below -80 indicates that the security is trading at the bottom end of the high low range over the last 14 periods. One can adjust these threshold limits for overbought and oversold as per the characteristics of the underlying security. However, one should keep in mind that an overbought reading on the oscillator doesn’t necessarily mean that the stock is going to reverse. In fact it can remain in the overbought territory for extended periods of time.
-50 Crossovers: Williams %R oscillates within a range of 0 to -100 with -50 as the midpoint. A cross above the -50 level is considered as bullish, while a cross below the -50 level is considered as bearish.
Williams %R Divergences: When prices make a higher high while the Williams %R refrains from doing so and makes a lower high instead we have a Bearish Divergence in place. Conversely, when prices make a lower low but the oscillator refrains from making a lower low, we have a Bullish Divergence in place. These divergences are helpful in identifying the instances when the stock is losing momentum on either the upside or the downside and can often indicate trend reversals.
For more information on proven trading strategies using the Williams %R oscillator, please click here.
To learn more on trading strategies that work, please attend our Qualified Market Trader (QMT) stock market program.