Williams %R Indicator Guide: Master This Momentum Tool

Williams %R, also known as Williams Percent Range, is a powerful momentum indicator developed by legendary trader Larry Williams. This indicator is similar to the Stochastic Oscillator but with an inverted scale, making it particularly useful for identifying overbought and oversold conditions. In this guide, we will explain how Williams %R works and how you can use it effectively in your trading.

What is Williams %R?

Williams %R is a momentum indicator that measures where the current closing price sits relative to the highest high over a specific lookback period. Unlike most oscillators that range from 0 to 100, Williams %R ranges from 0 to -100, with readings closer to 0 indicating overbought conditions and readings closer to -100 indicating oversold conditions.

How Williams %R is Calculated

The formula for Williams %R is straightforward:

%R = ((Highest High - Close) / (Highest High - Lowest Low)) x -100

Where:

• Highest High = The highest price over the lookback period (typically 14 periods)
• Lowest Low = The lowest price over the lookback period
• Close = The most recent closing price

Understanding the Williams %R Scale

The inverted scale can be confusing at first, but here is how to interpret it:

• 0 to -20: Overbought zone. The price is near the top of its recent range.
• -20 to -80: Neutral zone. The price is somewhere in the middle of its range.
• -80 to -100: Oversold zone. The price is near the bottom of its recent range.

Williams %R vs Stochastic Oscillator

Williams %R and the Stochastic Oscillator are closely related. In fact, Williams %R is essentially the inverse of the %K line from the Fast Stochastic:

• When Stochastic %K reads 80, Williams %R reads -20
• When Stochastic %K reads 20, Williams %R reads -80

The main differences are that Williams %R uses a single line (no smoothing) and the inverted scale. Some traders prefer Williams %R for its responsiveness, while others prefer the Stochastic for its smoother signals.

Trading Strategies with Williams %R

1. Overbought and Oversold Trading

The most common strategy is to trade reversals from extreme readings:

• Look for buy opportunities when %R drops below -80 and then moves back above it
• Look for sell opportunities when %R rises above -20 and then moves back below it

2. Failure Swings

Failure swings are powerful reversal signals that occur when the indicator fails to reach an extreme level on a retest:

• Bullish Failure Swing: %R drops below -80, bounces, drops again but stays above -80, then breaks above the prior bounce high
• Bearish Failure Swing: %R rises above -20, pulls back, rises again but stays below -20, then breaks below the prior pullback low

3. Divergence Trading

Divergence between price and Williams %R can signal impending reversals:

• Bullish Divergence: Price makes lower lows while %R makes higher lows. This suggests selling pressure is weakening.
• Bearish Divergence: Price makes higher highs while %R makes lower highs. This suggests buying pressure is weakening.

4. Trend Confirmation

Use Williams %R to confirm trend direction and find entries:

• In an uptrend, %R will typically stay above -50 and make higher lows
• In a downtrend, %R will typically stay below -50 and make lower highs
• Use pullbacks to oversold in an uptrend as buying opportunities
• Use rallies to overbought in a downtrend as selling opportunities

Optimal Settings for Williams %R

The default period setting is 14, but you can adjust it based on your trading style:

• Shorter periods (5-10): More sensitive, generates more signals, better for day trading and scalping
• Default period (14): Balanced sensitivity, good for swing trading
• Longer periods (20-28): Less sensitive, fewer but more reliable signals, better for position trading

Combining Williams %R with Other Indicators

Williams %R works best when combined with other technical tools:

• Moving Averages: Use MA crossovers to determine trend direction, then use %R for timing
• Support and Resistance: Look for %R signals at key price levels for higher probability trades
• Volume: Confirm %R signals with volume analysis for added conviction
• RSI: Use RSI as a secondary momentum confirmation

Common Mistakes to Avoid

Here are the pitfalls traders often encounter with Williams %R:

• Trading every extreme reading: Just because %R hits -90 does not mean you should buy. Wait for confirmation of a reversal.
• Ignoring the trend: In strong trends, %R can stay overbought or oversold for extended periods. Countertrend signals often fail.
• Using it in isolation: Always combine %R with other analysis methods for better results.
• Confusion with the scale: Remember that -20 is overbought and -80 is oversold. The inverted scale trips up many beginners.

Tips for Success with Williams %R

• Start with the default 14-period setting and adjust based on your results
• Always identify the trend first before looking for %R signals
• Wait for price confirmation before entering trades based on %R signals
• Use proper risk management with stop losses on every trade
• Keep a trading journal to track which %R setups work best for you

Summary

Williams %R is a valuable momentum indicator that helps traders identify overbought and oversold conditions. Its inverted scale (-100 to 0) takes some getting used to, but once you understand it, the indicator provides clear signals for potential reversals. Remember to always combine Williams %R with trend analysis and other confirmation tools, and never forget proper risk management.

Ready to explore more technical indicators? Check out our guide on the Stochastic Oscillator or learn about the Commodity Channel Index (CCI).