The Williams %R, sometimes referred to simply as “%R”, is a momentum indicator that was developed by Larry Williams. It’s similar to the Stochastic Oscillator but presented in an inverse manner. The main purpose of the Williams %R is to measure the current price in relation to the highest high and the lowest low over a specified number of periods.
Here’s a breakdown of the Williams %R:
- Formula: \text{%R} = \frac{\text{Highest High} – \text{Close}}{\text{Highest High} – \text{Lowest Low}} \times -100
- Highest High: The highest price over a specified number of periods.
- Close: The most recent closing price.
- Lowest Low: The lowest price over a specified number of periods.
- Range: The value of Williams %R ranges between -100 and 0.
- Interpretation:
- Overbought Territory: Typically, a reading above -20 is considered overbought.
- Oversold Territory: A reading below -80 is considered oversold.
- When the Williams %R crosses above the overbought line (after being below it) or below the oversold line (after being above it), it can indicate a potential price reversal.
- Use in Trading:
- Traders can use the Williams %R to identify potential buy or sell signals. For instance, when the indicator moves from below -80 to above -80, it may be considered a potential buy signal. Conversely, when it moves from above -20 to below -20, it might be seen as a potential sell signal.
- As with all indicators, it’s best to use the Williams %R in conjunction with other tools and analyses to confirm signals and reduce the chances of false positives.
- Settings:
- The default look-back period for the Williams %R is typically 14 periods. However, traders can adjust this according to their preference or the specific asset they are trading.
In summary, the Williams %R is a versatile tool that helps traders identify overbought and oversold conditions in the market. However, like any technical trading indicator, it should not be used in isolation but rather in combination with other analysis methods to ensure the most accurate trading decisions.
