What is Williams %R Indicator? Formula, Uses, and Limitations

Williams %R is a technical indicator. A reading between 0 and -20 indicates overbought level. A reading between -80 and – 100 indicates oversold level. Larry Williams created the Williams %R indicator in 1960. This is a momentum oscillator used to determine when a trade is overbought or oversold.

This indicator, which ranges from 0 to -100, aids traders in identifying possible reversals. It may help in improving the timing of entry-exit points during times of market volatility.

Today, we will explore the Williams percentage R indicator, its formula and how it is calculated, its advantages, limitations, the difference between the Williams %R and the Fast Stochastic Oscillator, and other important information.

What is Williams %R Indicator?

Created by Larry Williams, the Williams %R indicator is a momentum indicator. It is also known as the Williams Percent Range. Williams %R indicates the position of the closing price in relation to the highest high within a specified look-back period.

In contrast, the Stochastic Oscillator shows the closing price relative to the lowest low. Williams %R adjusts for this inversion by multiplying the raw value by -100. Consequently, the Fast Stochastic Oscillator and Williams %R produce identical lines but differ in their scaling.

Williams %R indicator ranges from 0 to -100. This means that levels from 0 to -20 are deemed overbought, whereas levels from -80 to -100 are considered oversold. As expected, the signals generated from the Stochastic Oscillator are also relevant to the Williams %R indicator.

Formula & Calculation of Williams %R Indicator

To calculate the Williams %R indicator, the following formula is used:

%R = (Highest High – Current Close) / (Highest High – Lowest Low) * – 100

• Lowest Low = The lowest low for the look-back period.
• Highest High = The highest high for the look-back period.
• %R is multiplied by -100 to correct the inversion and move the decimal.

The price for the Williams %R indicator is usually for the previous 14 periods. For each of the 14 days, note the high and low points.

• It is important to note the current, highest, and lowest prices for the 14th period. All of the Williams %R indicator formula variables are now available to you.
• Note the current, highest, and lowest prices for the 15th period, but only for the previous 14 periods, not the most recent 15. Determine the new Williams percentage R value.
• Calculate the new Williams %R after each period, utilising only the data from the previous 14 periods.

Interpretation and Working of Williams %R Indicator

Williams %R indicator formula measures the close relative to the high-low range over a set period, ranging from 0 to -100. A close near the high results in a higher %R (e.g., -20), while a close near the low results in a lower %R (e.g., -70).

The -50 midpoint is key: a value more than -50 suggests strength (upper range), and less than -50 indicates weakness (lower range).

Readings below -80 signal oversold conditions and above -20 indicate overbought levels, helping traders identify potential reversals.

Advantages of the Williams %R Indicator

Here are some of the advantages of the Williams %R indicator:

• Entry and Exit Points

Williams %R can be used effectively at entry and exit points. When the indicator is above -20 (overbought) or below -80 (oversold), it signals overbought or oversold conditions. Traders use these levels to enter or exit trades, so that they can lock possible profits at key market turning points.

• Confirmation Tool

Williams %R can be used as a confirmation tool with other indicators. It helps validate and confirm trends other technical analysis methods indicate, enhancing their reliability.

• Risk Management

Williams %R helps you manage risk by providing signals of extreme market conditions. When the indicator shows overbought or oversold conditions, it suggests that prices might reverse. Traders can adjust stop-loss orders or reduce position size to minimise possible loss.

Limitations of Williams %R Indicator

Here are some of the limitations of the Williams %R indicator:

• Lack of Trend Confirmation

Williams %R does not confirm whether a trend is in place, making it less useful in trending markets. While it can identify overbought or oversold conditions, it does not indicate the strength or direction of the trend, potentially leading to false signals in strong trends.

• No Price Trend Information

Unlike trend-following indicators like moving averages, Williams %R provides no information about the overall price trend. It only focuses on the current position of prices relative to recent highs and lows, which can be misleading in volatile markets.

• Limited Application for Range-Bound Markets

Williams %R may give too many signals of overbought or oversold conditions in range-bound or sideways markets, leading to whipsaws and confusion. Its effectiveness is diminished in such market conditions, where prices oscillate within a range rather than trending.

• No Consideration of Fundamental Factors

Williams %R is a purely technical indicator and does not factor in fundamental analysis. It may provide misleading signals in markets influenced by significant news events or changes in economic conditions that are not reflected in price movements.

• Parameter Sensitivity

The performance of Williams %R heavily depends on its settings. Minor adjustments to the time period or threshold levels can lead to drastically different signals. This sensitivity makes it less reliable if incorrectly calibrated, and its performance may vary across various asset classes or timeframes.

Other Technical Indicators To Pair With the Williams %R

Here are some other technical indicators you can pair with the Williams %R:

• Trend Confirmation: Use moving averages to identify the overall trend direction. This will allow you to act only on the Williams %R signals that align with the prevailing trend.
• Volatility Assessment: Bollinger Bands can help gauge market volatility, providing context for how extreme the Williams %R readings might be.
• Divergence Confirmation: Look for divergences between the price action and the Williams %R to signal potential reversals.
• Momentum Strength: Indicators like RSI and CCI can give more insights into the strength of price movements, complementing the overbought/oversold signals from the Williams %R.

The Difference Between Williams %R vs the Fast Stochastic Oscillator

Conclusion

Larry Williams indicator, known as Williams %R, measures overbought and oversold conditions in the market, ranging from 0 to -100. The indicator helps traders identify potential reversal points by indicating when an asset might be overbought or oversold.

While it is particularly effective in range-bound markets and short-term trading, its sensitivity can lead to false signals, especially in trending markets. To mitigate these risks, it’s often used with other tools and indicators for confirmation.