Developed by Larry Williams, Williams %R, also known simply as %R, is a momentum indicator that is popular for measuring overbought and oversold levels. The scale ranges from 0 to negative 100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. The %R indicator shows the relationship of the close relative to the high-low range over a set period of time, usually 9, 14 or 28 days. 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).
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 that Larry Williams used was to wait for the %R line to cross below negative 30 if the indicator was overbought near 0, or wait for the %R line to cross above negative 70 if the indicator was oversold near negative 100.
Below is an example of the daily DOW chart with its associated Williams %R. For this analysis, we set the %R setting to a 28 day interval, which smooths the data and eliminates some of the choppiness and false signals. The trigger to “go short” is set when the %R line drops down from an overbought level (zero) down through -30 (dotted line). And the trigger to “go long” is set when the %R line climbs from the oversold level (-100) up through -70. Note that many good triggers where given by the %R indicator in this example.