Larry Williams – Accumulation and Distribution

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Larry Williams developed the Williams Accumulation/Distribution to quantify positive and negative market pressure. It should not be confused with the Chaikin Accumulation/Distribution indicator, which was developed by Marc Chaikin and is based on volume and price data. In technical analysis, Chaikin Accumulation/Distribution is used to examine the accumulation and distribution of traded shares (volume) – how many shares were accumulated during an up-move (during purchasing) and how many shares were disseminated during a down-move (during selling). Williams’ Accumulation/Distribution is exclusively dependent on price data, and accumulation/distribution is the total of positive (accumulation) and negative (distribution) price changes.

Signals, Technical Analysis, and Trading Systems

Williams Accumulation/Distribution is used in technical analysis to measure/compare bullish and bearish price pressure. A technical analyst should seek for a divergence between a price and an indicator, according to Larry Williams theory. He claims that:

When the price makes a new low but the accumulation/distribution sign fails to make a new low, buying should be considered; similarly selling should be considered when the price makes a new high but the accumulation/distribution indicator fails to make a new high.

When the price rises, the WAD rises as well – positive price movements are added to this indicator. When prices fall, negative price movements are eliminated from WAD, and this indicator falls. However, because Larry Williams employs True High (TRH) and True Low (TRL) in Accumulation/Distribution calculations (see formula below), there may be times when price hits a new high but WAD does not, or when price lowers to a new low but WAD does not. To further grasp what we have when searching for price/indictor divergence, we must dig deeper into the WAD calculations and examine what sort of price behavior may lead to a divergence and why we should consider it a buy/sell opportunity.

On Chart #1, you can see a thorough depiction of a situation in which there is a negative divergence between price and the Accumulation Distribution indicator – when price achieves a new high but the WAD does not. According to the Accumulation/Distribution computations, this condition is mathematically conceivable when:

We had a minor reversal following the price up-move when price was setting new highs.
We had negative bars (bars close below previous close) during this correction, and these negative bars had significant positive openings (bars open above previous close), followed by a strong recovery that set a new high.

When looking for a negative price/WAD divergence, we may state that we are looking for a correction following an up advance with certain price behavior: when we have a strong positive start (above previous close) and then decrease, resulting in negative trading (close before previous close). This indicates that, despite a favorable opening, there is consistent and significant bearish (selling) pressure pushing the price down, resulting in negative trading. Despite heavy negative pressure, we have just a shallow decline as a result of the strong bullish opening. If we have a big spike of Bullish pressure during this shallow correction, we may have a new high in price and the Accumulation distribution will fail to create a new high. Overall, the Bears are fairly powerful and can provide consistent selling pressure. On the other hand, we have big bullish pressure spikes that generate a strong positive opening, but consistent and powerful bearish pressure brings the price down in the end. In this case, when we see a significant rebound with a news high, we may conclude that it was produced by a big increase in Bullish pressure. However, as previously said, strong and persistent Bearish pressure should push price down, and this could be a good time to consider selling.

When we find negative divergence between price and accumulation/distribution indicator, we detect a shift in market behavior – formerly steady and powerful Bulls with weak Bears became strong and stable Bears with strong short-lived Bullish pressure spikes.

The Williams’ Accumulation/Distribution indicator is a leading indicator, which anticipates price trend changes in the future. A negative price/indicator divergence predicts a potential price drop when the price is setting new highs. The accumulation/distribution indicator, like all leading indicators, is not always used. As a result, it may be prudent to hold off on initiating a “sell” transaction until a slump has been confirmed. However, because the WAD signal has previously verified a “sell,” a confirmation of a price decline may not be as powerful.

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