Williams %R is a momentum indicator developed by well-known trader and trading educator Larry Williams. It is an oscillator that moves between 0 and -100. It is intended to provide insight into the weakness or strength of a financial instrument; be it a stock, futures forex pair or exchange traded fund. It can be used to measure overbought/oversold levels, to confirm momentum and to provide trade signals.

Calculation

The formula used to calculate Williams %R is straightforward:

%R = (highest high - close) / (highest high - lowest low) * -100

Lowest low = the lowest low within the look back period

Highest high = the highest high within the look back period

We multiply the ratio by -100 for two simple reasons: to invert the values so overbought and oversold are intuitively displayed and to move the decimal place.

The default lookback period setting for Williams %R is 14, which can be days, weeks, months or any intraday time frame depending on the time period of the trader’s chart. A 14-period %R would use the most recent close, the highest high over the last 14 periods and the lowest low during the last 14 periods.

The Williams %R only has one line by default. The position of that line is key to what the indicator is telling us. When the indicator is...

• near zero, it shows the price is trading near or above the highest high during the look back period.
• near -100, the price is trading near or below the lowest low during the look back period. 
• above -50, the price is trading within the upper portion of the look back period. 
• below -50, the price is trading in the lower portion of the look back period. 

A look at Apple Inc.’s (AAPL) price moves on a chart offers several examples of Williams %R at both overbought and oversold levels, and clear indications of how the stock moved afterward (see “Equity extremes,” below).

Interpretation

The interpretation of Williams %R is very similar to that of the stochastic oscillator, except that the stochastic oscillator has internal smoothing.

The oscillator ranges from 0 to -100. No matter how fast a security advances or declines, Williams %R will always fluctuate within this range. Overbought and oversold levels can be used to identify unsustainable price extremes. In fact, the indicator’s most reliable application is as a broad measure of overbought and oversold conditions. Simply put, readings in the range of 80% to 100% indicate that the security is oversold while readings in the 0% to 20% range suggest it is overbought.

As with all overbought/oversold indicators, it is best to wait for the security’s price to change direction before placing your trades. An overbought period can remain so for an extended period. For example, if an overbought/oversold indicator (such as the stochastic oscillator or Williams %R) is showing an overbought condition, it is wise to wait for the security’s price to turn down and violate some other technical condition before shorting the security. 

Often, Williams %R identifies a reversal in the stock market, and at times it can be very precise. The indicator almost always forms a peak and turns down a few days before the security’s price peaks and turns down. Likewise, Williams %R usually creates a trough and turns up a few days before the security’s price follows.

Strong trends can present a problem for all overbought and oversold levels. For example, Williams %R can become overbought (>-20) and prices can simply continue higher when the uptrend is strong. Conversely, Williams %R can become oversold (<-80) and prices can simply continue lower when the downtrend is strong.

“Pressing the case” (below) shows Amazon (AMZN) with a 14-day Williams %R oscillator on a daily time frame. Working from left to right, AMZN became overbought at -3 in early December around $696. Amazon did not top out as soon as the overbought reading appeared. It took two to three days, but then we saw a fall of almost $149 (or about 19%). From overbought levels of -3.1, Williams %R moved to around -98 in mid-January to become oversold. Despite this oversold reading, AMZN continued to decline and the final bottom was made on Jan. 20.

This behavior shows why traders should always confirm Williams %R with price action. As we can see, on Jan. 20, a hammer candlestick pattern formed, confirming the oversold condition and a short-term bottom was in place. The market rallied until $638, where Williams %R became overbought and we again saw a decline.

Centerline Crossover

In addition to identifying overbought and oversold levels, Williams %R is useful for marking points of sentiment shift in the markets. Center line crossovers — where the line crosses above the -50 level — are powerful indicators that the price bias has fully turned the corner from bearish to bullish, or vice versa.

As shown “New market order” (below), Microsoft (MSFT) on the shown hourly time frame on Apr. 20 formed a doji candlestick pattern, suggesting a trend reversal shortly before breaking support at -50 on Williams %R. As we can see on the chart, the oscillator was overbought and then the stock price started to decline before Williams %R crossed the center line. Thereafter, the bulk of the bearish move happened. 

As we see in this example, it is always recommended to combine price action with oscillator signals to increase the odds of success. The bar that pushed the Williams %R reading below -50 for MSFT was a doji, which indicates trend reversal if the next candlestick is also bearish. In addition, it’s good practice in such a case to short the stock with a stop just above the high of the doji candlestick. In this case, the trader would have entered the market just when the bearish momentum was at its highest. Hence, you could have gotten away with placing a smaller stop loss, which would in turn increase your risk to reward ratio on this particular trade.

Divergences

A Williams %R divergence occurs when price and the oscillator indicate different things, such as rising prices in the presence of a declining oscillator. Such a difference in behavior suggests the price trend is losing momentum and a reversal is looming. There are two types of divergences to understand: bearish and bullish. 

A bullish Williams %R divergence occurs when the oscillator becomes oversold but then moves higher while prices in the underlying market move to a lower low. A bearish Williams %R divergence occurs when price makes a new high but Williams %R makes a lower high.
As seen in “Two directions” (below), which depicts a daily chart of Facebook  (FB) stock, price made a low of $77.22 on May 5, while Williams %R moved into the oversold zone. Then it moved up and formed a higher high while price made a lower low of $76.79 on May 12. Once Williams %R moved above -80 and we had a bullish engulfing pattern such as that shown in the chart, it indicated a reversal. Price rallied until it hit $83.

Anticipating the Market

The Williams %R oscillator is a rather unique momentum indicator that has stood the test of time. The indicator is better suited to identify potential reversals with overbought/oversold levels and bullish/bearish divergences. As with all indicators, Williams %R should not be used by itself.

Price action pattern analysis can be combined with Williams %R to validate the indicator’s signals and improve its robustness. By combining price action and use the Williams %R to confirm the momentum in the market, your chance of ending up with a profitable trade increases tremendously.