Williams %R, developed by legendary trader Larry Williams, is a momentum indicator that measures overbought and oversold levels. Similar to the Stochastic Oscillator but inverted, Williams %R is known for its speed and sensitivity in identifying potential reversal points and momentum shifts.
What is Williams %R?
Williams %R (also called Williams Percent Range) measures where the current closing price sits relative to the highest high over a specified lookback period. The indicator oscillates between 0 and -100.
Key concept: Williams %R shows how close the current close is to the recent high. A reading of 0 means the close is at the high of the range. A reading of -100 means the close is at the low of the range.
How Williams %R is Calculated
The formula for Williams %R is:
- %R = (Highest High - Close) / (Highest High - Lowest Low) x -100
The standard lookback period is 14 periods.
Williams %R Levels
- 0 to -20: Overbought zone - price is near its recent highs
- -20 to -80: Normal trading range
- -80 to -100: Oversold zone - price is near its recent lows
Reading Williams %R
14-day high: $55, 14-day low: $45, Current close: $53
%R = ($55 - $53) / ($55 - $45) x -100
%R = $2 / $10 x -100 = -20
A reading of -20 indicates the stock closed near the top of its range (overbought).
Williams %R vs Stochastic
Williams %R and the Stochastic %K are essentially mirror images:
- Williams %R: 0 is at top, -100 is at bottom
- Stochastic %K: 100 is at top, 0 is at bottom
- Williams %R = Stochastic %K - 100
The main difference is that Williams %R has no signal line built in (no %D equivalent), making it a faster but potentially noisier indicator.
How to Trade Williams %R
1. Overbought/Oversold Signals
- When %R rises above -20 (overbought) and then falls back below -20, consider selling
- When %R falls below -80 (oversold) and then rises back above -80, consider buying
Strong Trends Warning
In strong uptrends, Williams %R can stay in overbought territory for extended periods. In strong downtrends, it can stay oversold. Trading against the trend based solely on %R levels can lead to losses.
2. Failure Swings
Failure swings are powerful reversal signals:
- Bullish failure swing: %R falls below -80, bounces, fails to reach -80 on next decline, then breaks above the bounce high
- Bearish failure swing: %R rises above -20, declines, fails to reach -20 on next rally, then breaks below the decline low
3. Williams %R Divergence
Divergence between price and Williams %R can signal potential reversals:
- Bullish divergence: Price makes lower low, %R makes higher low
- Bearish divergence: Price makes higher high, %R makes lower high
Bullish Divergence Example
Stock drops from $50 to $45, Williams %R drops to -95.
Stock bounces to $47, %R rises to -60.
Stock drops again to $43 (lower than $45).
Williams %R only drops to -88 (higher than -95).
This bullish divergence suggests the downtrend may be losing momentum.
Williams %R Trading Strategies
Momentum Strategy
- Wait for %R to reach extreme territory (-80 or -20)
- Do not trade immediately at the extreme
- Wait for %R to exit the extreme zone
- Enter in the direction of the exit
- Use the extreme reading as your stop loss reference
Trend Continuation Strategy
- Identify the primary trend using moving averages
- In uptrends, look for %R pullbacks to -80 (oversold)
- Buy when %R turns back up from -80
- In downtrends, look for %R rallies to -20 (overbought)
- Sell when %R turns back down from -20
Multiple Timeframe Strategy
- Use higher timeframe Williams %R to identify the trend
- Use lower timeframe Williams %R for entry timing
- Only take signals that align with the higher timeframe direction
Multi-Timeframe Example
Daily Williams %R is in the upper half (bullish bias).
Hourly Williams %R drops to -85 (oversold).
This is a buying opportunity - short-term oversold in an overall bullish environment.
Williams %R Settings
- 14 period: Standard setting, good balance
- 10 period: More sensitive, faster signals
- 20-28 period: Smoother, fewer signals, less noise
Shorter periods work better for short-term trading; longer periods for swing trading.
Combining Williams %R with Other Indicators
- Moving Averages: Use MA for trend direction, %R for entry timing
- RSI: Confirmation when both show overbought/oversold
- MACD: Use MACD crossovers to confirm %R signals
- Volume: Higher volume at %R extremes strengthens the signal
Common Mistakes to Avoid
- Buying immediately when %R hits -100 or selling at 0
- Trading against strong trends based solely on %R
- Ignoring price action and chart patterns
- Using %R as your only indicator
- Not waiting for confirmation before entering trades
Limitations of Williams %R
- Very sensitive indicator that can generate many false signals
- Works best in ranging markets, less effective in strong trends
- No built-in signal line, which can make timing difficult
- Should not be used in isolation
Track Your Williams %R Trades
Pro Trader Dashboard helps you analyze which Williams %R setups and market conditions work best for your trading style.
Summary
Williams %R is a fast momentum oscillator that identifies overbought and oversold conditions. Readings above -20 indicate overbought markets, while readings below -80 indicate oversold markets. The key to using Williams %R effectively is waiting for the indicator to exit extreme zones before trading, looking for divergences, and always considering the broader trend. Combine Williams %R with trend indicators and other confirmation tools for the best trading results.
Learn more: Stochastic Oscillator and RSI Indicator.