How to Use Williams % R Indicator: Identify Overbought/Oversold

Trying to predict market sentiment alone is not enough to make a significant profit in crypto markets. Technical indicators and charts are equally important. The Williams percentage range (Williams %R) is an indicator that helps investors time the market. It can be used to predict price retracements or reversals before they happen.

What is the Williams R Indicator?

Introduced by Lary R Williams in 1973, The Williams Percentage Range (or %R) is a popular momentum indicator “that moves between 0 and -100 to measure overbought and oversold levels”. Additionally, the indicator shows two horizontal lines that represent -20 and -80 by default. The 0 to -20% levels illustrate an overbought asset, while the -80 to -100% levels show an oversold one. Here’s an image for reference:

Source: Investing

Williams %R vs. Other Technical Indicators

The Williams %R is often compared to the Stochastic Oscillator because they both measure momentum except the Williams %R has a 0 to -100 scale whereas the Stochastic Oscillator ranges from 0 to 100. The Williams %R is also similar to the Relative Strength Index (RSI) because they both measure the strength or weakness of a current trend. However, the difference between the two is that while RSI uses a mid-point (-50%) to determine the strength of a trade, William %R utilizes extreme levels (-20 and -80) for signals.

How to Calculate William’s %R?

The percentage range is based on 14 designated periods and can be computed on a monthly, weekly, daily, or intraday basis.

Here is the William R indicator formula

%R = [(Highest High – Current Close) / (Highest High in N periods – Lowest Low in N Periods)] * -100%

• Highest High is the highest price during the look-back period.
• Lowest Low is the lowest price during the look-back period.
• Current Close is the asset’s recent closing price.

To calculate %R:

• Step 1: Find the lowest low and highest high of each period for the last 14 days. 
• Step 2: Record the current, highest, and lowest price of an asset on the 14th period. 
• Step 3: Plug these figures into the formula above and compute the Williams %R. 

How to interpret the Williams %R?

Interpreting William %R depends largely on the period setting and the asset’s specific traits. It can indicate three things:

Identify an Overbought Asset

-20%< Williams %R<0

An asset is overbought when its Williams %R is anywhere from 0 to -20%. In most cases, this indicates an upward trend in which buyers have more power than sellers because they have pulled the market into the overbought area. Since the asset is likely overpriced, its price is expected to fall after a certain period.

Identify an Oversold Asset

-100% < Williams %R < -80% 

When an asset is at a Williams %R of -80% to -100%, it falls under the oversold category. In such conditions, sellers are more powerful than buyers as they can push the market into the oversold area. Therefore, the underlying instrument becomes undervalued and price is expected to bounce back as time passes.

Identify a Neutral Asset

-100% < Williams %R < -80% 

A Williams %R level between -20% and -80% is regarded as in the neutral area. The power between the sellers and buyers is neutral. Momentum failure also occurs at this level. For example, when traders overbuy %R, it will go below the -20% line and if the price doesn’t return to its original position, it will be an indicator of a momentum failure as the price will eventually reverse after a certain time. In order to determine the direction in which the price will move, most traders add another horizontal line at -50%. When the %R is between -20 to -50% level, it indicates that the price is likely to fall further. On the other hand, when the %R is between -80 to -50%, the market is expected to close near the highest price.

Conclusion

Traders around the world use the William %R indicator to anticipate an asset’s closing price in relation to a specific price range at a given time. It can help identify oversold and overbought markets but should not be used as a standalone indicator to identify bearish and bullish divergences.