The Williams %R, also known as Williams Percent Range, is a momentum oscillator developed by famous trader Larry Williams. This indicator measures overbought and oversold levels by comparing the closing price to the high-low range over a specific period. Its simplicity and effectiveness have made it a favorite among traders for identifying potential reversal points.
What is Williams %R?
Williams %R is a bounded oscillator that moves between 0 and -100. It shows where the current close is relative to the highest high over the lookback period. A reading near 0 means the close is near the period high (overbought), while a reading near -100 means the close is near the period low (oversold).
Key insight: Williams %R is essentially an inverted Stochastic oscillator. While Stochastic measures how close the price is to the high, Williams %R measures how far it is from the high. The interpretation is similar, just with inverted values.
How Williams %R is Calculated
The Williams %R calculation is straightforward and uses only three values:
Williams %R Formula
%R = (Highest High - Close) / (Highest High - Lowest Low) x -100
- Highest High: The highest price over the lookback period (typically 14 days)
- Lowest Low: The lowest price over the lookback period
- Close: The current closing price
The result ranges from 0 to -100, with the negative sign being a convention of the indicator.
Interpreting Williams %R Levels
Understanding what different %R values mean is crucial for effective trading:
Standard Interpretation
- 0 to -20: Overbought territory - price is near the top of its recent range
- -20 to -80: Neutral zone - price is within normal range
- -80 to -100: Oversold territory - price is near the bottom of its recent range
Important Note
Unlike what beginners often assume, overbought does not automatically mean sell, and oversold does not mean buy. In strong trends, the indicator can stay overbought or oversold for extended periods while price continues moving in the trend direction.
Williams %R Trading Signals
The indicator provides several types of trading signals:
1. Overbought/Oversold Reversals
The classic approach waits for the indicator to reverse from extreme levels:
- Buy signal: %R rises above -80 after being below it
- Sell signal: %R falls below -20 after being above it
2. Failure Swings
Failure swings occur when %R fails to reach its previous extreme before reversing:
Bullish Failure Swing
- %R falls below -80 (oversold)
- %R rises back above -80
- %R pulls back but stays above -80
- %R breaks above the previous peak
This pattern often precedes significant upward price moves.
3. Divergence Signals
Divergences between price and %R can signal potential reversals:
- Bullish divergence: Price makes lower lows while %R makes higher lows
- Bearish divergence: Price makes higher highs while %R makes lower highs
Williams %R Trading Strategies
Strategy 1: Trend Pullback Trading
In trending markets, use %R to time entries during pullbacks:
- In uptrends: Wait for %R to reach oversold (-80 to -100), then buy when it turns up
- In downtrends: Wait for %R to reach overbought (0 to -20), then sell when it turns down
- Always confirm the trend with moving averages or other trend indicators
Strategy 2: Mean Reversion
In range-bound markets, trade reversals from extreme levels:
- Identify support and resistance levels that define the range
- Buy when %R is oversold and price is at support
- Sell when %R is overbought and price is at resistance
- Use tight stops in case the range breaks
Strategy 3: Dual Timeframe Approach
Use %R on two timeframes for better signals:
- Higher timeframe determines trend direction
- Lower timeframe provides entry signals
- Only take lower timeframe signals in the direction of the higher timeframe trend
Williams %R vs Stochastic
Since Williams %R and Stochastic are closely related, understanding their differences helps you choose:
- Scale: Stochastic is 0 to 100; Williams %R is 0 to -100
- Smoothing: Stochastic has %K and %D lines (smoothed); %R is typically unsmoothed
- Signals: Stochastic offers crossover signals; %R focuses on levels
- Speed: %R is often faster and more responsive
Combining %R with Other Indicators
Williams %R works best when combined with complementary tools:
- Moving averages: Confirm trend direction before taking %R signals
- RSI: Use both oscillators for confirmation of overbought/oversold
- Support/resistance: Look for %R reversals at key price levels
- Volume: Confirm %R signals with volume patterns
Williams %R Settings
The standard setting is 14 periods, but adjustments can suit different trading styles:
- Shorter periods (5-10): More sensitive, more signals, good for day trading
- Standard period (14): Balanced approach, suitable for swing trading
- Longer periods (21-28): Smoother, fewer false signals, better for position trading
Common Mistakes to Avoid
- Trading every extreme: Not every overbought/oversold reading leads to a reversal
- Fighting strong trends: %R can stay extreme for extended periods in trends
- Ignoring context: Always consider the broader market trend
- Using %R alone: Confirm signals with price action and other indicators
Track Your Oscillator Trades
Pro Trader Dashboard helps you analyze which indicators work best for your trading style. Track your Williams %R trades and see your performance by setup type.
Summary
Williams %R is a fast, simple momentum oscillator that helps identify overbought and oversold conditions. Its strength lies in its responsiveness and ease of use. Remember that extreme readings do not guarantee reversals - always confirm with price action and other indicators, and be especially careful trading against strong trends.
Ready to explore more oscillators? Check out our guide on RSI indicator or learn about the Ultimate Oscillator.