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.