Developed by and named after Larry Williams, his Price Accumulation/Distribution indicator is a price change index, whereby the biggest price difference from today’s high or low, or yesterday’s closing price is subtracted from today’s closing price.
Concretely, if prices are rising, the True Low (i.e. daily low or yesterday’s closing price) is subtracted from today’s closing price. Conversely, if prices are falling, the True High (today’s high or yesterday’s closing price) 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 values.
The cumulative sum of these (possibly extended) price changes is the Williams’ Accumulation/Distribution, a price index open in both directions with the starting value of zero.
The Accumulation/Distribution indicator bases its calculations on the difference between the Close and True High and True Lows and does not consider volume in its calculations.
Formula
Ct > Ct-1 --> Xt = Ct - MIN(Lt,Ct-1)
Ct < Ct-1 --> Xt = Ct - MAX(Ht,Ct-1)
ADt = Xt + ADt-1
Interpretation
The Williams’ Accumulation/Distribution Index study attempts to measure market pressures. It specifically looks for market divergence. The study serves to measure market strength and sentiment. You can use the normal technical tools on the study, such as trendlines, breakouts, support, and resistance. However, you must watch for instances of substantial divergence from the Williams’ Price Accumulation/Distribution index versus the underlying chart as the key to future price direction.
If the market continues to stampede into new high ground, the Williams’ Price Accumulation/Distribution study should follow suit. When the market makes several new highs but the Williams’ Price Accumulation/Distribution fails to make new highs, it is a warning signal of a market about to reverse direction, and in this instance, Williams recommends establishing a selling position. Conversely, a buy signal occurs when the Williams’ Price Accumulation/Distribution fails to make lower lows while market prices drift to lower levels, indicating accumulation of the instrument. In either case, divergence implies a reversal if the dominant trend is near.
Once you spot divergence, initiate a market position when you spot a clear break in the trendline of the Williams’ Price Accumulation/Distribution index. This minimizes the possibility of taking a position before the actual trend reverses.
Literature
Williams, Larry. Secret of Selecting Stocks. Windsor Books. N.Y. 1986.