In his original work, Williams' method focused on 10 trading days to determine a market's trading range. Once the 10-day trading range was determined, he calculated where the current day's closing price fell within that range.
The %R study is similar to the Stochastic indicator, except that the Stochastic has internal smoothing and that the %R is plotted on an upside-down scale, with 0 at the top and 100 at the bottom. The %R oscillates between 0 and 100%. A value of 0% shows that the closing price is the same as the period high. Conversely, a value of 100% shows that the closing price is identical to the period low. The Williams indicator is designed to show the difference between the period high and today's closing price with the trading range of the specified period. The indicator therefore shows the relative situation of the closing price within the observation period.
The trading rules are simple. You sell when %R reaches 20% or lower (the market is overbought) and buy when it reaches 80% or higher (the market is oversold). However, as with all overbought/oversold indicators, it is wise to wait for the indicator price to change direction before initiating any trade.
Larry Williams defines the following trading rules for his %R: Buy when this percent reaches 100%, and five trading days have passed since 100% was last reached, and after which it again falls below 85/95%. Sell when %R reaches 0%, and five trading days have passed since 0% was last reached, and after which the Williams %R again rises to about 15/5%.
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