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AD - Williams AD

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Introduction
Larry Williams created this indicator in an attempt to measure market pressures. It specifically looks for a difference in price and then measures that difference. It is a tool used to measure market sentiment and strength. The key is to look for strong differences in what the market does as opposed to what the indicator does. Looking for substantial divergence from the AD index versus the underlying chart is the key to future price direction.

Interpretation
The indicator is computed by taking the previous day's close and comparing it to the current day's close. If the close of today was higher, then the low for the period is subtracted from the current day's close, and added to the current AD. A pattern of higher highs would show a consistently increasing AD. If the close of today is the same as yesterday then there is no change in the AD. If the close of today is lower than yesterday's low, the close of today is subtracted from the high for the current period and that difference is subtracted from the AD.

The main thing to look for is a difference in the AD and the market trend. If a market were to make a matching or lower low, or a matching or higher high and the AD fails to follow the market trend then this is divergence. Divergence implies that a reversal in the dominant trend may be near.

A series of lower lows would read as a decreasing AD. The pattern created by the AD and the differences in the chart are what the trader looks for. Divergence, or a difference from the pattern, is what you want to see. For example, if the market continues to march to higher territory and the AD follows by doing the same, then there is no divergence. However, if the market makes several new highs but the AD fails to make new highs, it is a warning signal of a market about to reverse direction.

Example of the Williams AD in the Indicator Window:

Calculation
Formula:
The AD index is computed several different ways. Some computations normalize the index, while others add extra smoothing factors through the use of moving averages

The first comparison checks for accumulation (i.e. Is the current close higher than the previous close?). If the market is accumulating, then compute the difference between current close and low. Next, add that arithmetic difference to the Accumulation/Distribution Index. Traders perceive an undervalued market and they buy. The procedure is:

If Closet > Closet-1 then ADt = ADt-1 + (Closet - Lowt)

The second comparison checks for no change in price. If correct, the AD index does not change. It states: If Closet = Closet-1 then ADt = ADt-1
The last and final comparison checks for a down market. It checks for the current close below previous close. If that's correct, the market is distributing. The software first computes the difference between current high and close. It then subtracts that difference from the AD index. This measures market distribution. Traders perceive an overvalued market and are selling. The final computation is:

If Closet < Closet-1 then ADt = ADt-1 - (Hight - Closet)

ADt: The accumulation/distribution index for the current period.
ADt-1: The accumulation/distribution index for the previous period.
Closet: The closing price for the current interval.
Closet-1: The closing price for the previous interval.
Hight: The true high price for the current interval.
Lowt: The true low price for the current interval.

Note: The true high is the higher value of the current high or the previous close. The true low is the lower value of the current low or the previous close.

Customizing
To change the settings of this indicator, open the Program Options screen by clicking the "Program Options" button located on the main Toolbar.

See the Program Options section for more details on changing the settings.

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