Accumulation/Distribution Indicator

November 21, 2023 - Around 3 mins mins to read

Understanding the Accumulation/Distribution Indicator

The Accumulation/Distribution Indicator is a tool based on price and volume that helps determine the current and future trend of an asset. It examines the relationship between a stock’s closing price and its volume flow. The term “accumulation” refers to the level of buying or demand, while “distribution” refers to the level of selling or supply.

Traders use this indicator as a momentum indicator to identify tops and bottoms in asset charts and anticipate trend reversals.

It accomplishes this by displaying the relationship between an asset’s price and the proportion of buyers and sellers in the market. Traders utilize this information to determine if the market is bullish (increasing) or bearish (decreasing) by searching for a divergence between the price and the indicator.

When the price of an asset sharply declines, any subsequent increase may indicate an increase in demand, suggesting that sellers are losing influence and buyers are gaining power. The accumulation/distribution line will start moving in the opposite direction of the price, signaling a possible reversal.

To calculate the Accumulation/Distribution Indicator (A/D), follow these steps:

Calculate the Money Flow (MF) multiplier by subtracting the low price of the period from the closing price and dividing it by the difference between the high and low prices of the period.

The formula for the Money Flow multiplier is:

(Closing Price – Low price of the period) – (High price of the period – Closing Price) / (High price of the period – Low price of the period)

Calculate the Money Flow Volume by multiplying the Money Flow multiplier with the period’s volume.

Money Flow Volume = Money Flow Multiplier × Period Volume

Add the previous Accumulation/Distribution (A/D) value to the Money Flow Volume of the current period.

A/D = Previous A/D + Money Flow Volume (current)

Repeat the process after each period, adding or subtracting the new Money Flow Volume from the previous total to calculate the Accumulation/Distribution (A/D) value.

The Accumulation/Distribution line illustrates how supply and demand impact pricing. Price fluctuations can cause the A/D line to move in the same direction or the opposite direction.

The ADL is a useful tool for evaluating price patterns and potentially predicting future reversals. When the price of an asset falls while the ADL rises, it indicates buying pressure and suggests that the asset’s price may reverse to the upside.

It’s important to note that the A/D line does not consider trading gaps. Therefore, when these gaps occur, they may not be reflected in the A/D indicator. Additionally, since the A/D line is calculated using closing prices, it may be challenging to identify small changes in volume flows. The slowing pace of a downtrend may not be noticeable until the ADL starts to rise.

Glossary