The Williams %R (%R) is a technical indicator that indicates the closing price's position relative to the highest high over a defined period, typically 14 days or periods. Also referred to as the Williams Percent Range, it is classified as a momentum oscillator, which means it is utilized to identify overbought and oversold conditions.

Developed by Larry Williams, a well-known author and trader in stocks and commodities, the Williams %R indicator is just one of many tools he has created. Other indicators include the Ultimate Oscillator, COT indices, accumulation/distribution indicators, cycle forecasts, market sentiment measures, and value assessments for commodity prices. However, his most notable creation may be his daughter, Michelle Williams, the acclaimed actress who has won two Golden Globes for her role as Marilyn Monroe in the film My Week with Marilyn.

Williams %R functions similarly to the Stochastic oscillator and is applied in a comparable manner. This indicator assists traders in identifying entry and exit points based on overbought and oversold conditions, as well as shifts in bullish or bearish momentum.

The Williams %R reveals the current price's position relative to the highest high over the last 14 periods (or any chosen lookback period). A bounded oscillator is an indicator that has defined minimum and maximum values. For Williams %R, this means its value cannot exceed 0 or fall below -100. The indicator fluctuates between 0 and -100, with -50 as the midpoint.

A reading closer to -100 indicates that the price is near the lowest low in the lookback period, while a reading closer to 0 suggests that the price is near the highest high. If Williams %R crosses above -50, it indicates that prices are trading in the upper half of the high-low range for the specified lookback period, signaling a bullish trend. Conversely, if it crosses below -50, it indicates that prices are in the lower half of the high-low range, signaling a bearish trend.

The default settings for Williams %R designate -20 as the overbought threshold and -80 as the oversold threshold. The readings can be interpreted as follows:

• A reading above -20 is considered overbought.
• A reading below -80 is considered oversold.

In more detail, readings above -20 indicate that the price is trading near the upper end of its high-low range, while readings below -80 suggest that the price is trading near the lower end. During an uptrend, traders should wait for Williams %R to drop below -80. When the price begins to rise and the indicator moves back above -80, it signals a potential resumption of the uptrend. In a downtrend, traders should wait for Williams %R to rise above -20. If the price starts to fall and the indicator drops back below -20, it signals a possible continuation of the downtrend.

It is also important to monitor for fading momentum. In a strong uptrend, Williams %R often reaches -20 or higher. If the indicator declines and fails to rise back above -20 before falling again, it suggests that upward price momentum is weakening, and a price drop may follow. Similarly, in a strong downtrend, Williams %R typically reaches -80 or lower. If the indicator increases and cannot fall back below -80 before rising again, it indicates that downward price momentum is weakening, and a price increase may occur.

When using the Williams %R indicator, there are several considerations to keep in mind:

• Overbought/Oversold does not guarantee a trend reversal. Just because Williams %R indicates "Overbought" or "Oversold" does not ensure that a reversal will happen. An "Overbought" reading suggests that the price is near previous highs or making new highs, indicating a strong uptrend. Therefore, Williams %R can remain "Overbought" if the price continues to rise.
• An "Oversold" reading indicates that the price is near previous lows or making new lows, suggesting a strong downtrend. Thus, Williams %R can remain "Oversold" if the price continues to decline.
• It is crucial to remember that even if an asset is overbought or oversold, it can remain in that state for an extended period, potentially leading to significant losses.
• Be cautious of false signals. The Williams %R indicator can produce misleading signals. For instance, a 14-period Williams %R may show "Oversold" and begin to rise, but the price may remain flat or even decrease. This occurs because the indicator only considers the last 14 periods, and as time passes, the current price relative to the high and low range of the lookback period can change, even if the price itself has not moved.

The formula for calculating Williams %R is as follows:

%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

The %R value is multiplied by -100 to correct the inversion and adjust the decimal. The Williams %R is calculated based on price, typically over the last 14 periods. To compute it:

1. Record the high and low for each period over the last 14 periods.
2. In the 14th period, note the current price, highest price, and lowest price.
3. In the 15th period, note the current price, highest price, and lowest price, but only for the last 14 periods (not the last 15).
4. Compute the new Williams %R value.
5. As each period concludes, calculate the new Williams %R, using only the last 14 periods of data.