Meaning & Implication:
Williams %R, also known as the Williams Percent Range, is a type of momentum indicator that moves between 0 and -100 and measures overbought and oversold levels. The Williams %R may be used to find entry and exit points in the market. The indicator is very similar to the Stochastic oscillator and is used in the same way. It was developed by Larry Williams and it compares a stock’s closing price to the high-low range over a specific period, typically 14 days or periods.
Image-1 indicates an example showing short trade (according to %R circled red), and profit booking (%R circled green).
How to Use Williams %R While Trading?
The indicator is telling a trader where the current price is relative to the highest high over the last 14 periods (or whatever number of lookback periods is chosen).
When the indicator is between -20 and zero the price is overbought, or near the high of its recent price range. When the indicator is between -80 and -100 the price is oversold, or far from the high of its recent range.
During an uptrend, traders can watch for the indicator to move below -80. When the price starts moving up, and the indicator moves back above -80, it could signal that the uptrend in price is starting again.
The same concept could be used to find short trades in a downtrend. When the indicator is above -20, watch for the price to start falling along with the Williams %R moving back below -20 to signal a potential continuation of the downtrend.
Limitations of Using the Williams %R
Overbought and oversold readings on the indicator don’t mean a reversal will occur. Overbought readings actually help confirm an uptrend, since a strong uptrend should regularly see prices that are pushing to or past prior highs. The indicator can also be too responsive, meaning it gives many false signals.