Developed by Larry Williams, the William’s Percent Range (%R) is a technical analysis oscillator that shows the present closing level of a commodity or stock relative to the high-low range over a given number of days, very similar to the Stochastic Oscillator, determining whether the market is overbought or oversold. The Williams %R is normally used to establish entry and exit points in the market.
The Williams %R is ranging between -100 and 0, where values between -80% and -100% indicates the market is oversold, and values between -0% and -20% indicates the market is overbought. Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable to Williams %R.
Since the Williams %R moves between 0 and -100, the centreline, -50, is an essential level to keep an eye on. Crossing above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period. This suggests that the cup is half empty.
%R = (Highest High – Close) / (Highest High – Lowest Low) * -100
Where Lowest Low = lowest low for the look-back period,
Highest High = highest high for the look-back period,
%R is multiplied by -100 correct the inversion and move the decimal.
The default setting for Williams %R is 14 periods, which could be days, weeks, months or even an intraday timeframe. A 14-period %R would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods.
1) Overbought or oversold
As a bound oscillator, the William’s Percent Range is able to identify overbought and oversold levels. Since it ranges from 0 to -100, no matter how fast a security advances or declines, the Stochastic Oscillator will always fluctuate within this range.
In traditional settings, -20 would be used as the overbought threshold and -80 as the oversold threshold. In this case, when the oscillator moves above -20 of the indicator, it shows that asset could be overbought. Conversely, when it moves below -80, it indicates that the asset could be oversold.
2) Momentum failure
The failure to move back into overbought (or oversold) territory after exceeding the threshold more than once signals a change in momentum that can foreshadow a significant price move.
According to the Figure 1, the ability to consistently move above -20 is a show of strength. After all, it takes buying pressure to push %R into overbought territory. Once a security shows strength by pushing into overbought territory more than once, a subsequent failure to exceed this level shows weakening momentum that can foreshadow a decline.
Williams %R is a momentum oscillator that measures the location of the close in relation to the high-low range over a given period of time. Not only helping investors make a good entry or exit decision mentioned above, it can be also used to help define the bigger trend (six months), as 125-day %R covers around 6 months Prices are above their 6-month average when %R is above -50, which is consistent with an uptrend. Readings below -50 are consistent with a downtrend.
Like many other indicators, it is important and necessary to use the Williams %R in conjunction with other technical analysis tools, which make predictions more accurately.