Accumulation/Distribution Indicators

What is the Accumulation/Distribution indicator?

Accumulation/ Distribution indicator is also known as A/D or Accum/Dist. This an indicator of the technical analysis designed to relate price and volume in the stock market. It acts as a leading indicator of price movements.
 
A/D is a cumulative indicator that assesses whether a stock is being accumulated or distributed. The measure of A/D aims at identifying divergences between the stock price and the volume flow. 
 
This gives an understanding of how powerful a trend is. However, if the price is rising but the indicator is dropping, it shows that buying or accumulation volume may not be enough to support the price rise and a price decline could be forthcoming.

History of Accumulation/Distribution Indicator

In the 1980s, a prominent trader and stock analyst Marc Chaikin founded the  Accumulation/Distribution line. It helps to predict future price changes by using the relationship between the price and volume of the asset. As a stock selection tool, it determines the flow of money into or out of a security. But as a leading indicator for other markets, including Forex, it has found wider application.

Interpreting the Accumulation/Distribution indicator

It is relatively easy to interpret the A/D indicator. First, you need to make sure you are using a trending chart. The use of a consolidating chart isn’t ideal.

Second, you need to check which period is used by default. It is recommended to most people that you use the default period. Finally, you can buy if the A/D measure goes up, and sell when it moves down.

 

How does Accumulation/Distribution indicator work?

The upward trend is expected to persist as both price and accumulation/distribution allow higher peaks and higher troughs. While the uptrend is expected to continue and the downward trend is expected to persist when A/D allows lower peaks and lower troughs. If the A/D increases during a trading range, then accumulation may occur. This is a warning of an upward breakdown. But if the A/D is decreasing during a trading range, then the distribution may take place and this is a warning of a downward breakdown.
 
The Accumulation/Distribution Line looks at the level of the closing point for a given time (day, week, month), compared to the high-low scale. The AD line does not recognize the transition from one time to the next. With this formula, a protection gap could close lower. If the closing is beyond the midpoint of the high-low range the accumulation/distribution line would increase.
 
Again, if the price continues to peak higher and A/D fails to peak higher, the upward trend is likely to stagnate or fail. This is called negative divergence. If the price keeps making lower troughs and A/D does not produce lower troughs, the downward trend is probable to stall or fail. This is called positive divergence.
 
When breaking down the formula, the money flow equation is essentially what allows the ADL to rise or fall. The Money Flow Multiplier is calculated by the relation between the closing price of a period and the high/low range of that time.
 
The Money Flow Multiplier is always within 1 and -1 intervals. The Money Flow Multiplier will grow closer to 1. If a cycle ends in the upper half of the high/low spectrum, the money flow multiplier will sink into -1 when time ends in the lower half of the high/low scale. The closer the multiplier gets to 1, the higher the purchase pressure.
 
Thus, the ADL will rise when you combine a highly positive multiplier with a strong volume. If you combine a highly negative multiplier with a strong volume, the pressure to sell will increase and the ADL will fall. ADL should also be used as a means of calculating the purchasing and selling power (accumulation and distribution) of the demand. With this in mind, ADL is a powerful resource both to validate patterns and to predict reversal.

How can I identify Accumulation and Distribution?

A bullish stock always gives strong signals of an accumulation of stock or a higher stage of demand. But, in the form of distribution, the bearish stocks exhibit more supply than demand. The more we define accumulation, the more demand there is on supply to buy. The more distribution, the more pressure of sale demand.

How to spot trends using Accumulation/Distribution indicator

1.   If stock with positive volume pattern (accumulation) is in an uptrend: expect uptrend to continue.

2.   If stock with negative volume (distribution) is in a downtrend: expect downtrend to continue.

3.   If stock with negative volume (distribution) in an uptrend: assume reversal at any stage

4.   If the stock is in a downtrend with a positive volume (accumulation): expect a reversal.

5.   When stock range-bound or bottoming with new accumulation: expect breakout sometime.

6.   If stock range-bound or bottoming with new distribution: Expect breakdown at some point to spot bearish or bullish signals, a trend in the underlying security must be detectable. Upon establishing this, start looking for a divergence from that trend. When these divergences are spotted, be it bullish or bearish, it is best to allow the signals to develop for a week or two.

7.   Keep an eye out for flat signs or those without a sharp difference in bearish trends – this can also mean that potential improvement is possible.




How can I use the Accumulation/Distribution Indicator?

The A/D line’s key application is to track differences in demand change and volume movement. The index of accumulation /distribution gives us a representation of demand and supply. The line’s direction indicates whether the most prevalent pressure on the market is buying or selling.
 
When we see the A/D signal line rising, purchasing for our instrument (accumulation) is on the increase in the market. If you see the A/D signal line drop, it indicates that the upper hand (distribution) is under sales strain. If there is an agreement between the A/D indicator and the price, then our confidence in the current trend is given weight.
 
Perhaps more interesting though, are those times when no agreement is reached. The divergence between price and our indicator is a significant signal. Unless the demand declines and the A/D measure increases, we might foresee an expected price increase. That is a bullish setback. Conversely, if the price rises while the A/D indicator falls, it suggests prices may be about to fall. That is, there may be a bearish turnaround on the table.

Importance of Accumulation/Distribution Indicator

A/D indicator trading signs are usually used to check if a stock is trending, whether the trend is strong to last, or forecast future price reversals.
 
Traders use an index of accumulation/distribution to determine how a given asset is generated or dispersed. The trading technique for the A/D measure can be used to detect likely price and volume divergences or to confirm a trend.
 
This also lets warnings for possible reversals be observed. It will give a peek into the future market activity. By looking at a piling up of pressure on the market, you can estimate the type of trading positions that could be taken. Another advantage of using the ADL is it will help the traders confirm the power of the pattern.

What are the market conditions for Accumulation/Distribution Indicators?

A/D is better sold according to market divergences with the price. If the market rallies to a new peak while A/D marks a lower peak, a short signal is generated. This implies that professional traders are selling the rally.
 
The bullish difference produces a buy signal as the stock hits a lower low when the indicator approaches a higher level as experienced traders buy into the dip.

What are the trading strategies for Accumulation/Distribution indicators?

The four trade signals tips using the Accumulation/Distribution Indicator are:

1.   ADL Trend Confirmation: It is very easy to understand the trend confirmation signal line. It also consists of two types:

2.   Bullish ADL Trend-Confirmation. When the A/D signal line rises during high volume times, the bullish trend-confirmation signal line comes. This means that accumulation is ongoing which is likely to lead to an increase in the security price.

3.   Bearish ADL trend-confirmation. The warning for trend confirmation for bearish arrives as the A/D signal line declines at high volume periods. This warning arrives when rates are set to fall. Those two signals are crucial to the A/D oscillator’s success. They are used by traders to set entry and exit points on the chart to hop into emerging trends and exit at the right moment.

4.   ADL Divergence: This is another significant feature of the accumulation/distribution measure. There are two types of ADL divergence based on their potential:

5.   Bullish ADL Divergence. We must have to find a couple of things in the chart to get a bullish ADL divergence. The primary item you need is to take market action bearish. The latter is a rising ADL. These are generating a strong bullish signal on the chart.

6.   Bearish ADL divergence. We need to define the exact opposite configuration to get a bearish ADL divergence. With an ADL decreasing, we want to identify bullish price action. Those provide a powerful bearish signal on the map. The ADL contrasts the current near with high current and low current. The OBV is contrasting the latest closure with the previous closing.

First of all, see how the stock declines. Next, whether there is a high volume to help the transfer confirm the pattern is strong. Live in business as long as the trading judgment is backed by the two metrics.

Disadvantage of the Accumulation/Distribution indicator

The potential downside of the A/D indicator is that it does not include changes in price ranges between periods in the Money Flow Multiplier. ADL may not sometimes reflect the price action, which means that potential gaps will not be reflected either.

How to avoid trade mistakes using Accumulation/Distribution indicator

Avoid using the indicator of accumulation/distribution as a standalone tool. When you need to check trend direction, apply the accumulation/distribution indicator. When you realize that higher lows and higher highs are created by the price value and the indicator, that indicates an upward trend.
 
The negative or downward tendency can be predicted as lower lows and lower highs form the price and the A/D indicator.

What other indicators can be used with Accumulation/Distribution indicators?

Although it is also possible to use the A/D signal line on its own. Incorporating volume into price analysis is critical and the A/D Line is one of the metrics for doing that. Other metrics that provide price and volume analysis which may be more reliable than the A/D line include the Chaikin oscillator, price-volume trend indicator, money flow index, and Relative Strength Index (RSI).
 
Combining Indicators and Oscillators like adding either MFI, RSI or both is much more beneficial. Because both MFI and RSI have ranges, they can be used to illustrate extreme situations the spotlight on the A/D signal line was not meant for.
 
Also, other technical indicators, such as the moving average, relative strength index, MACD, can be used with the ADL.
You can check which volume indicator is a better fit for your trading strategy by checking alternative volume indicators.

Wrapping up on Accumulation/Distribution indicator

The A/D signal line is in the end an effective tool in the arsenal of any trader. This A/D line indicator was ay to confirm an existing trend. Using the A/D signal line alone is one way to check a vulnerability. But it can also be used to improve an inspection for either MFI or RSI since both RSI and MFI work well with the A/D signal line. T0hey can be used together to give a better sense of overbought or oversold situations.
 
The A/D signal line is in the end an effective tool in the arsenal of any trader. This A/D line indicator was developed with a view of stocks. Stocks now, of course, have the number of details accessible. In its calculations, instead, the Forex A/D indicator relies on volume ticks for the volume coefficient.
 
Now, the number of changes in ticks is a reasonable volume proxy so this is not a problem. It is a normal forex process and is often used in the volumes indicator. How often the correlation between the indicator and price tends to hold true is a bigger drawback for the volume A/D indicator.
 
Traders need to be careful with certain occasional periods of divergence. Especially divergence between the price and the A/D axis, which may signify a market pattern change. Discipline, also, is an important trading skill and definitely this predictor needs aptitude in this field. Accumulation /distribution is one of the market’s most common technical indicators.
 
This is a perfect volume-based measure that is easy to quantify and so simple to use. It’s recommended you spend time with it creating your strategy.

FAQ's

The A/D calculation comprises three mechanisms – the Money Flow Multiplier (MFM), the Money Flow Volume (MFV) and the Accumulation/Distribution line (ADL).

MFM = ((Close – Low)– (High – Close)) / (High – Low) 

Money Flow Volume (MFV) = MFM x Period Accumulation Distribution Line (ADL)

ADL = Previous Period ADL + Current MFV

Though both ADL and OBV appear identical. There are several variations in how they are measured, the strength of buying and selling forces is measured using it. This calculates the purchasing and disposal of energy as a composite measurement that adds volume on days up and subtracts volume on days down
 
When the security shuts higher than the previous close, the volume of the whole day is called up-volume. When the security shuts below the previous close, the volume of the whole day is known as down-volume. Some traders are now adding these metrics as part of their trading plan to get their indications and validate them.

When there is consensus between the A/D indicator and the market, then our confidence in the current trend is given weight. Nonetheless, the Forex accumulation/distribution measure indicates divergence-increasing as the market drops.

Basically, the Accumulation / Distribution Line indicator is calculated in three steps:

1.   Calculate the Money Flow Multiplier (MFM), creating a distribution line for accumulation. When the multiplier has a positive value, the line increases and falls while the multiplier is negative. It is calculated as follows: [(close – low) – (high – close)]/(high – low).

2.   Multiply the measured MFM over the given time by the quantity and get the money flow volume (MFV). It is determined as follows: for the time mfv = mfm x length.

3.  Maintain a running total of Money Flow Volume to form the ADL (Accumulation Distribution Line): ADL = Previous ADL + Money Flow Volume for the current period.

When a stock or other asset’s price rises, particularly on increasing quantity, it’s said it’s under accumulation. That means traders and investors are willing to mass-buy the asset. Once the value of the asset begins to decline, that is called distribution.

By identifying the patterns if the big bars are green, and the smaller bars are red, we can decide that sharer purchases more than volume selling. This is piling up. When the major bars are purple, on the other hand, and the smaller bars are white, there is more sale than buying. This signal indicates distribution.