Developed by successful commodity trader Larry R. Williams, the Williams Percentage range or %R is a technical indicator which is the inverse of the fast Stochastic Oscillator. The Williams Percentage range measures the current close in relation to the highest high of the selected period. This is to be contrasted with the standard Stochastic oscillator which gives a gauge of the current close in relation to the lowest low of the selected period. This means that the fast Stochastic oscillator and Williams Percent Range give exactly the same lines, with only the scaling being different. It should thus be unsurprising that signals derived from the use of the fast Stochastic Oscillator can also be used with the Williams Percent Range.
The Williams Percent Range is calculated in the following way:
%R= (Highest High – Close) / (Highest High – Lowest Low) * -100
- Lowest Low, the lowest close during the selected period.
- Highest High, the highest close during the selected period.
Thankfully the majority of trading programs will calculate the Williams Percent Range for you, but the above formula should demonstrate how the indicator is the inverse of the fast Stochastic Oscillator. The Williams Percentage Range always oscillates between 0 and -100.
As an oscillator the Williams Percent Range can be useful for determining overbought and oversold levels. The oscillator always ranges between o and -100. regardless of the volatility of the particular instrument. Traditionally, technical analysts take -20 reading as indicating that an instrument is overbought and -80 to show that the instrument is oversold. For instance readings above -20 would show that the particular instrument in question was trading near the highest high of the selected period. While readings below -80 would show that the instrument was trading near the lowest low of the selected time period.
It is always important to realize that overbought and oversold indicators are not necessarily bearish/bullish, as with other overbought/oversold (such as the RSI and the Stochastic Oscillator) indicators the Williams Percent Range has the ability to mislead a trader. The indicator tends to breakdown during periods when the market is trending strongly, it is possible for instance for a instrument to become overbought and remain so during a period of trending conditions. This is why overbought/oversold indicators tend to be used alongside other technical indicators in order to provide confirmation that an instrument is indeed overbought/oversold.
Apart from being an overbought and oversold signal, the Williams Percent Range can be used to identify a change in momentum which may foreshadow a significant reversal. Typically continued readings above the -20 level would indicate that the instrument is trending upwards. This is due to the fact that it takes considerable buying pressure to push the indicator above -20 level. If an instrument has consistently shown strength by moving into the -20 or above range, a subsequent failure to break this barrier may foreshadow a price reversal or a beginning of a new trend.
The Williams Percent Range can be a useful indicator when used correctly, but one has to be wary when using it on it’s own as overbought and oversold indicators are notoriously unreliable during periods when an instrument is trending strongly in one direction. More sophisticated traders may also be able to use the indicator to determine when momentum is shifting allowing traders to get in on some significant price reversals and momentum shifts. As the Williams Percent Range is simply the inverse of the fast Stochastic Oscillator there is no benefit in using one indicator over the other, with it just coming down to personal preference.