The Williams %R (Williams Percent Range) is a momentum-based technical indicator that helps traders determine overbought and oversold conditions in a market. It was developed by Larry Williams and is similar in concept to the Stochastic Oscillator, but with a different scale. The indicator measures the level of the close relative to the highest high for a specific look-back period, typically 14 days or periods.
Formula:
Williams %R = [(Highest High – Current Close) / (Highest High – Lowest Low)] × -100
Where,
Highest High: The highest price over the look-back period (usually 14 days).
Lowest Low: The lowest price over the look-back period.
Current Close: The most recent closing price.
Interpretation of Williams %R
The Williams %R generates values that range from 0 to -100, with key levels at -20 and -80.
Overbought Condition: When Williams %R is between 0 and -20, it indicates that the asset is overbought, meaning the price may have risen too quickly and could be due for a pullback.
Oversold Condition: When Williams %R is between -80 and -100, it indicates that the asset is oversold, meaning the price may have fallen too quickly and could be due for a reversal to the upside.
Crossover Signals: While the Williams %R itself does not generate crossovers (like the Stochastic Oscillator), traders often use its movements relative to the overbought and oversold levels to signal potential buy and sell points.
Buy Signal: When the Williams %R moves out of the oversold zone (crossing above -80), it may signal a potential buying opportunity.
Sell Signal: When the Williams %R moves out of the overbought zone (crossing below -20), it may signal a potential selling opportunity.
Example of Williams %R
In EUR/USD’s daily chart below, you can see that the pair tried to extend its uptrend but failed to reach a new price and %R highs.
This means that prices aren’t hitting the high end of their range as quickly as they did before and that the bullish momentum might be running out of steam.
In this case, the pair ended up dropping 200 pips in a week!
Almost immediately after that, the price gained enough bullish momentum to push %R above its oversold levels.
But although EUR/USD is still poppin’ up red candlesticks, they’re not enough to drag Williams %R back to its previous lows.
Another loss of momentum?
Williams %R sure thought so!
Turned out, the bulls DID take over and pushed EUR/USD around 775 pips higher in less than 30 days.
