Williams %R, or simply just %R, is a momentum indicator popularly used by traders to find overbought and oversold levels. The indicator is similar to the %K of Stochastic Oscillator; the difference is that %R compares close to the highest high of a period opposing the lowest low as in stochastic oscillator. The formula is,
Where ‘t’ represents today and n represents the number of periods.
Unlike most other indicators, Williams %R indicator has a negative scale; the values range from 0 (highest value) to -100 (lowest value). A close nearer to the highest high period will take the indicator nearer to 0 (overbought) and a close nearer to the lowest low of the period will take the indicator nearer to -100 (oversold). The typical period is 14, but traders can adjust it to make the indicator more or less sensitive.
Generally, values ranging from 0 to -20 are considered overbought and those from -80 to -100 are considered oversold. But often overbought does not mean it’s the time to sell, or oversold does not mean it’s the time to buy, because in strong trends the prices can remain in one range for an extended period of time. Traders should trade in the direction of the trend. During the periods of strong uptrend, traders can buy when the indicator falls to oversold values; and during strong downtrends, traders can short when the indicator shows overbought readings. Bullish and bearish divergences are also good signals, crossing of -50 from below or above.
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