Williams %R is a momentum indicator. This oscillator was developed by Larry Williams. Mr. Williams indicates that the essence of his trading system is based on interpreting readings of %R. William %R, sometimes referred to as %R, shows the relationship of the close relative to the high-low range over a set period of time. The nearer the close is to the top of the range, the nearer to zero (higher) the indicator will be. The nearer the close is to the bottom of the range, the nearer to -100 (lower) the indicator will be. If the close equals the high of the high-low range, then the indicator will show 0 (the highest reading). If the close equals the low of the high-low range, then the result will be -100 (the lowest reading).
This method is used to decide market entry and exit point. The %R always ranges in between the value of 100 and 0. For day-trading, when % R reaches 10% or lower it is considered a sell indicator and when it reaches 90% or higher it is considered as a buy indicator. William’s %R takes into account ten trading periods to determine the trading range. Once the ten-period trading range is determined, the %R is calculated where current period’s closing price fall within that range. The signal is most useful in trending markets.
Williams’s %R has proven very useful for anticipating market reversals. It identifies overbought or oversold markets. It is important to remember that overbought does not necessarily imply time to sell and oversold does not necessarily imply time to buy. A security can be in a downtrend, become oversold and remain oversold as the price continues to trend lower. Once a security becomes overbought or oversold, traders should wait for a signal that a price reversal has occurred. One method might be to wait for Williams %R to cross above or below -50 for confirmation. Price reversal confirmation can also be accomplished by using other indicators or aspects of technical analysis in conjunction with Williams %R.
One method of using Williams %R might be to identify the underlying trend and then look for trading opportunities in the direction of the trend. In an uptrend, traders may look to oversold readings to establish long positions. In a downtrend, traders may look to overbought readings to establish short position.