Larry Williams developed an overbought/oversold oscillator that, like the others, compares the recent close to the market’s trading range over x days. Unlike with Stochastics, the today’s close is subtracted from the high of the range over x days and then divided by the range over those days. This yields an inverted oscillator where an oversold indication comes at the high values of the indicator value and overbought at the lows. Therefore, most services plot %R as a negative value to properly orient the resulting oscillator graph. Thus, oversold would be a -80 value or greater and overbought would be a -20 or less. As with equation below, most traders use a period length of 20 days. This follows the prevalent assumption that the market follows a monthly cycle of 20 trading days.

%R = (C â€“ H20) / (H20 â€“ L20)

Again, all of our usual oscillator caveats apply here. An overbought market may tend to remain overbought for quite a while as it continues its trend higher. The same is true with declining markets. It is best to wait for the oscillator to turn lower and cross below the -20 level for a sell signal or back above the -80 level for a buy. Williams %R is best utilized as a source of confirmation for pattern analysis or other technical indicators.