The Accelerator Indicator (AC) is another oscillator indicator created by Bill Williams and measures the acceleration and deceleration of the prevailing market forces. As an oscillator, it is plotted as a histogram below the chart. The premise behind this indicator is that prior to a market changing direction, the driving force in the market will change. This might allow the trader to anticipate this change and trade before the price action has started to follow the change in mood. Naturally, if any indicator can provide early warning signals, it could give advantages if interpreted correctly.
How does it work?
Williams stipulated that the zero line in the histogram is essentially the spot where the driving force is at balance with the Accelerator Indicator. This is likely to occur at quiet times or times of market indecision. On all other occasions the histogram will be either below or above zero. If the Accelerator is higher than zero, then it is usually easier for the acceleration of prices to continue upward (and vice versa in cases when it is below zero). However, unlike many other histograms, traders should not be looking to buy at above zero and sell when below zero. What is important with the Accelerator Indicator is the colour of the bars, whether they are above the zero line or not. The calculation for working these out is as follows (the smooth moving averages that Williams uses are five and 34 period):
MEDIAN PRICE = (HIGH + LOW) / 2
AO = SMA (MEDIAN PRICE, 5) - SMA (MEDIAN PRICE, 34)
AC = AO - SMA (AO, 5)
HIGH — the highest price of the bar;
LOW — the lowest price of the bar;
When this is plotted on the chart, as you can see above, you will have sequences of green and red coloured bars in the histogram. How are these then interpreted? Well, Williams specifies that firstly you should not be looking to buy with the help of the Accelerator when the current bar is coloured red, and you cannot sell when the current bar is green.
Secondly, Williams does not suggest straight buy and sell signals whenever the histogram is simply crossed. Instead, if you enter the market in the direction of the driving force or, in other words you trade with the trend, then you need two green columns to buy (two red columns to sell). If the driving force/trend is against/opposite to the position to be opened (indicator below zero for buying, or higher than zero for selling), a confirmation is needed, hence, an additional column is required. In this case the indicator must show three red columns over the zero line for a short position and three green columns below the zero line for a long position.
The Accelerator Indicator is more advanced than many histogram oscillators due to the fact of the dual colour coding bars. These provide signals that go both in the direction of the trade and against it, and at first this may appear complicated. However, Williams does set out clear rules that should be used to make the application of the indicator easier. If you are keen on using histograms to time your entries and exits, then you should definitely explore the Accelerator.