The Williams %R was developed by Larry Williams and is a momentum technical indicator that is used in technical analysis much like the Stochastic Oscillator. Like Stochastics, the Williams %R serves to define overbought and oversold levels. Values between 0 and minus 20 are considered to indicate an overbought condition, whereas readings in the minus 80 and minus 100 range indicate an oversold condition. The difference between Stochastics and the Williams %R indicators is that the first is always positive and moves between 0 and 100 and the second is always negative and moves in a range between minus 100 and 0.
In some resources, the William %R can be referred to as %R. This technical analysis is designed to show the relation of the closing price to the high - low range over the analyzed period. When the close price is near the high levels, the Williams %R will be close to zero. When the closing price is near the most recent lows, the Williams %R will be close to minus 100.
Where N is the bar period setting or number of bars that take part in defining the highest high and lowest low for the indicator calculations.
Traditionally the Williams %R indicator is calculated by using a 14-bar period setting and can be used in different timeframes starting with intraday charts where 1 bar = 1 minute up to monthly charts (1 bar = 1 month). Still, the use of a 14-bar period setting is not universal and we recommend that each trader analyze the most recent history to see which Williams %R setting will best fit his or her personal trading style. Depending on volatility, a trader may select a shorter period in more volatile markets and a longer period in less volatile markets.
As with Stochastics and other aspects of technical analysis that serve defining overbought/oversold levels, the overbought market (stock, security) does not necessarily imply that it is time to sell and an oversold market does not necessarily mean that it is time to buy. A stock (security) can be heavily overbought and still move up while a strongly oversold stock may continue to drop due to panic selling. We recommend that you wait before buying when the Williams %R moves above minus 80 after having been below this level (after being oversold) and wait before selling when the Williams %R drops below minus 20 after having been above it (after being overbought). A conservative approach could be to wait when the Williams %R crosses minus 50 for confirmation of a trend reversal.
Once a security becomes overbought or oversold, traders should wait for a signal that a price reversal has occurred. One method might be to wait for the Williams %R to cross above or below -50 for confirmation. A price reversal confirmation can also be obtained by other indicators or aspects of technical analysis in conjunction with the Williams %R.
Chart 1: Dow Jones Industrials (^DJI) - Williams %R and Slow Stochastics
Calculation of the Williams %R
Williams %R = [(High during N periods - Close)/(High during N periods - Low during N periods)] * (-100)
By Victor Kalitowski for MarketVolume.com