Williams %R
A momentum oscillator that identifies overbought and oversold levels.
Williams %R is a momentum oscillator developed by Larry Williams that measures where the current closing price sits relative to the highest high over a lookback period, typically 14 days. It ranges from 0 to -100. Readings between 0 and -20 indicate overbought conditions, and readings between -80 and -100 indicate oversold conditions. It is essentially the inverse of the fast stochastic %K, flipped upside down.
Why It Matters
Williams %R is fast and responsive — more so than RSI or the slow stochastic. This speed makes it useful for short-duration options trades where timing matters down to the day. When you are trading weekly options or short-dated spreads, you need an indicator that reacts quickly to momentum shifts. Williams %R delivers that sensitivity.
The indicator is also straightforward to interpret. It directly answers the question: "Where is the stock closing relative to its recent range?" If the answer is near the top (-5), the stock has been strong but may be overextended. Near the bottom (-95), it has been weak but may be due for a bounce. This simplicity makes it accessible for traders who want a clean momentum read without complex calculations.
How It Works
Calculation: %R = ((Highest High - Close) / (Highest High - Lowest Low)) x -100
Key levels:
- 0 to -20: Overbought zone. The stock is closing near the top of its 14-day range.
- -80 to -100: Oversold zone. The stock is closing near the bottom of its 14-day range.
- -50: Midpoint. Serves as a rough neutral level.
Trading signals:
- %R moves from below -80 back above -80: Oversold condition is resolving. Potential bullish entry.
- %R moves from above -20 back below -20: Overbought condition is resolving. Potential bearish entry or time to take profits on longs.
- Failure swings: If %R drops below -80, bounces to -50, drops again but stays above -80, and then rises — that is a bullish failure swing indicating support at lower prices.
Divergence: Like other oscillators, Williams %R can diverge from price. If the stock makes a new low but %R makes a higher low, buying pressure is building underneath the surface. This divergence is often a leading signal before the price itself reverses.
Limitations: The speed that makes %R useful also creates more noise. In trending markets, %R will flash overbought or oversold signals repeatedly while the trend continues. Pair it with a trend indicator like a moving average to filter out signals that go against the prevailing trend.
Quick Example
A stock in a confirmed uptrend (above its 50-day EMA) pulls back and Williams %R drops to -88 — deeply oversold within an uptrend context. You buy a call with three weeks to expiration. Within two days, %R climbs back above -80 as the stock bounces. You hold because the trend is intact. Over the next week, %R reaches -25 and you take profits on the call as momentum nears overbought territory.