Williams Accumulation Distribution

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Introduction

In his 1986 book, “Secret of Selecting Stocks” Larry Williams wrote about using market participants buying activities (accumulation) and market selling activities (distribution) to create his momentum indicator which he called the Williams Accumulation Distribution indicator, also known as the Williams AD.

The Accumulation Distribution indicator is a price change index that is designed to measure market pressures and more specifically to look for market divergence. The William AD indicator is useful in measuring market strength and market sentiment. Traders can use the Accumulation Distribution line to confirm trend direction and strength in addition to the typical technical analysis methods to monitor, such as trend lines, breakouts, support, and resistance.

According to Williams, the primary value of the Williams AD indicator was to look for divergences from the Accumulation Distribution indicator versus the underlying stock to predict future price changes.

Williams believed that if a stock was in a strong up-trend and continued to reach new highs then Williams AD indicator should follow suit. If the market sets multiple new highs but the oscillator fails to make new highs, traders should anticipate that the stock is about to change trend direction. When the Williams AD line fails to make new highs with the underlying stock, Williams recommends putting on short positions. Conversely, when the Accumulation Distribution indicator fails to make lower lows when the underlying stock continues to make lower lows he suggested establishing long positions. The key to both examples is that divergence implies a reversal in the current trend is about to occur.

After you identified a divergence in the Williams AD line and the underlying stock, traders should initiate positions only after a clear break in the trend line of the indicator is spotted. This will minimises the possibility of taking a position before the actual trend reverses.

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Calculation

There are four steps to calculating the Williams Accumulation Distribution:

  1. Compare the Closing Price to the Opening Price: Close-Open
  2. Then compare difference to the day’s range: (Close-Open) / (High-Low)
  3. Next multiply by Volume for trading day: (Close-Open) / (High-Low) * Volume
  4. The Williams Accumulation Distribution line is the cumulative total for each day’s calculation.

Interpretation

The Accumulation Distribution indicator bases its calculations on the difference between the Close and the High and the Low of each trading day. The Williams Accumulation Distribution is simply the cumulative sum of these price changes. When prices are rising, the Low is subtracted from today’s closing price. Conversely, if prices are falling, the high is subtracted from today’s closing price. If today’s close is equal to yesterday’s close, then today’s Accumulation/Distribution is zero. The Williams’ Accumulation Distribution indicator is a cumulative total of these daily calculations.

The Accumulation Distribution indicator uses volume to measure buying or selling pressure. An Accumulation Distribution value that is negative represent strong selling pressure and a positive value represent strong buying pressure. The Accumulation Distribution line can be used by traders to quickly confirm the strength of the current trend or alert that the current trend is weakening. Williams used divergences between the current price trend and oscillator as the primary technique to identify trend reversals.

Conclusion

Traders looking to study the actions of market participants can use the Williams Accumulation Distribution indicator for such purposes. Williams developed the Williams Accumulation Distribution indicator to ascertain if a stock was being controlled by buyers (accumulation) or by sellers (distribution) at any given moment in time. More importantly, Williams used the AD indicator to sport divergences in price action of the underlying stock and the indicator. Williams’ recommended selling when stocks continued to make new highs and the indicator fails to follow. Conversely, he suggested buying if stock prices continued to fall and make new lows yet the Accumulation Distribution indicator failed to so.