This is a momentum indicator developed by Larry Williams to capture the possible trend reversal points of a security. Most of the times, the indicator is used to measure the overstretched states of the prevailing trend, be it overbought or oversold. The formula is –

(Highest high in n periods – Last close)/(Highest high in n periods – Lowest low in n periods) * (-100)

The formula clearly shows the similarity to the Stochastic oscillator though the internal smoothing is missing in this case and the indicator is plotted upside down. The overbought state is marked by the band of 0 to (-20) and the oversold state by (-80) to (-100).

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Advantages And Limitations of William % R

The indicator is interpreted in the usual ways. Whenever the indicator reaches the overbought/oversold levels and turns back, it may be taken as a warning signal, due confirmation by the price itself. On the other hand, the crossing midline of (-50) can be used as a good trading signal too, especially as a further confirmation of earlier signals. Perhaps the best application of this indicator comes from the momentum failure giving birth to Divergences but it must be noted that just like Stochastics, this indicator too can give false signals and can remain in the overstretched levels if the trend is too strong.

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