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What Is Accumulation/Distribution Indicator?
The Accumulation/Distribution Indicator (ADI) quantifies the cumulative volume of a security to ascertain the dominance of buying or selling pressure in a market, facilitating trend identification and divergence analysis.
Oct 17, 2024 at 06:23 am
What Is Accumulation/Distribution Indicator?
1. Overview
The Accumulation/Distribution Indicator (ADI) is a momentum indicator used in technical analysis to measure the cumulative volume of a security over time. It helps traders understand the balance between buying and selling pressure in the market.
2. Calculation
ADI is calculated as follows:
ADI = Previous ADI + (Closing Price - Opening Price) * VolumeWhere:
- Closing Price is the price at the end of the trading day
- Opening Price is the price at the beginning of the trading day
- Volume is the number of shares traded during the day
3. Interpretation
ADI can be interpreted as follows:
- Positive ADI: Buying pressure is dominant, indicating a potential uptrend.
- Negative ADI: Selling pressure is dominant, indicating a potential downtrend.
- Divergences: When ADI diverges from price movements, it can signal a potential trend reversal. For example, if the price continues to rise but ADI starts to decline, it could indicate that the uptrend is losing momentum.
4. Applications
ADI is used in various trading strategies:
- Trend Identification: ADI can confirm or deny existing trends.
- Support and Resistance: ADI can identify potential support or resistance levels based on extreme values.
- Divergence Analysis: Divergences between ADI and price can provide insights into changes in trend momentum.
- Volume Analysis: ADI helps visualize the volume of buying and selling activity, which can complement price analysis.
5. Considerations
- ADI is a lagging indicator, meaning it reacts after price movements.
- It can be noisy in highly volatile markets.
- Combining ADI with other indicators can enhance its reliability.
6. Example
Let's assume the following data:
| Date | Open | Close | Volume | ADI |
|---|---|---|---|---|
| Day 1 | 10 | 11 | 100 | 100 |
| Day 2 | 11 | 12 | 120 | 240 |
| Day 3 | 12 | 11 | 110 | 330 |
In this example, the ADI shows that the volume of buying was dominant on Days 1 and 2, indicating a potential uptrend. However, on Day 3, the ADI declined while the price remained the same, suggesting a potential loss of momentum in the uptrend.
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