In his quest to find successful trading strategies, renowned futures author and
trader Larry Williams developed the Williams %R indicator, which he discussed in
his book “How I made a 1,000,000 last year trading commodities”. The
Williams %R is a momentum based indicator that is designed to identify overbought
and oversold market conditions.
The %R formula measures the current closing price of stock in relation to the high
and low of the stock in the past N days (for a given N). The %R indicator will help
investors or traders determine whether a stock is trading near the high or the low
of a selected trading range. Williams typically used 14 trading days in his calculation
of the %R. You can change the time period that so that value of N days matches your
trading time frame. The shorter period of N the more signals the indicator will
produce and a more volatile indicator will be. Conversely the longer the period
for N, the fewer signals the indicator will produce and less sensitive it will be.
Mathematically the %R behaves the same the stochastic %K indicator.
Williams designed the oscillator on a negative scale, from lowest being -100 up
to highest reading of 0. This may seem strange to traders who are already familiar
with the many of the other momentum indicators that are built on the opposite scale
of 0 to 100. The %R value of -100 represents the closing price today that is the
lowest low of the past N days, and a reading 0 is a close today that is the highest
high of the past N days. Readings below -80 are regarded as oversold conditions
and readings above -20 are overbought conditions.
One of the advantages of using the Williams % R indicator is that it is very easy
to identify buy and sell signals. Buy Signals are triggered when the %R moves above
the -80 level on the oscillator.