What Is Accumulation/Distribution Indicator?
The accumulation/distribution indicator is a price and volume-based indicator that determines the (current & future) trend of an asset. It does this by examining the relationship between the stock’s closing price and its volume flow. The term “accumulation” denotes the level of buying (demand), and “distribution” denotes the level of selling (supply) of an asset.
The accumulation/distribution indicator can be termed as a momentum indicator that is used by traders to spot tops and bottoms of asset charts to anticipate trend reversals.
It accomplishes this by displaying the relationship between an asset's price and the proportion of buyers and sellers in that market. Traders decide if the market is bullish (increasing) or bearish (decreasing). They do it by looking for a divergence in the price and the indicator.
After a sharp decline in the price of an asset, any increase might suggest that the demand is starting to increase, which means that sellers are losing influence and buyers are gaining power. The accumulation/distribution line will begin to move in the opposite direction of the price, indicating a possible reversal.
Here’s how you can calculate the accumulation/distribution indicator (A/D):
- The first step is to calculate the MF multiplier by noting down the previous closing, high, and low prices of an asset.
The formula for Money Flow multiplier:
(Closing Price - Low price of the period) - (High price of the period - Closing Price) / (High price of the period - Low price of the period)
- Then calculate the money flow volume by using the (current) period's volume and the value of multiplier calculated in the previous step.
Money Flow Volume = Money Flow Multiplier × Period Volume
- Now, add the last A/D value into the money flow volume.
A/D = Previous A/D + Money Flow Volume (current)
- After the conclusion of each period, repeat the process and keep adding or subtracting new money flow volume from the previous total to calculate the accumulation/distribution (A/D) value.
The accumulation/distribution line demonstrates how supply and demand influences pricing. Price fluctuations might cause the A/D line to move in the same way or the other direction.
The ADL is a tool that can be used to evaluate price patterns and possibly predict future reversals. When the price of an asset falls while the ADL rises, this indicates that purchasing pressure is there, and the price of the asset may reverse to the upside.
Trading gaps are not taken into account by the A/D line. As a result, when these gaps arise, they may not be taken into account at all by the A/D indicator. If a stock's price rises but then falls around the middle, the gap will be disregarded. The reason for this is that the A/D line is calculated using closing prices. It might be difficult to identify small variations in volume flows at times. A downtrend's pace of change may get slow, but this would be difficult to see until the ADL begins to rise.
