Williams %R is a momentum indicator that is designed to identify overbought and oversold areas in a non trending market. Williams %R was developed by Larry Williams. The Williams %R is interpreted similarly to the Stochastic Oscillator only plotted upside-down. It also lacks the internal smoothing found in the Stochastic Oscillator. Readings in the range of -80 to -100% indicate that the security is oversold while readings in the 0 to -20% range suggest that it is overbought.
As with all overbought/oversold indicators, it is best to wait for the security's price to change direction before making any trades. It is not unusual for overbought/oversold indicators to remain in that condition for a long time as the security's price continues to climb/fall. Selling on the first indication of an overbought signal may reduce yields as it could be some time before the price shows signs of deterioration.
An interesting phenomena of the Williams %R indicator is its ability to anticipate a reversal in the underlying security's price. The indicator almost always forms a peak and turns down a few days before the security's price follows suit. Likewise, Williams %R usually creates a trough and turns up a few days before the security's price turns up.
The formula to calculate Williams' %R is:
( Highest High in n periods - Today's Close / Highest High in n periods - Lowest Low in n periods ) * -100