The accumulation/distribution indicator is a price and volume-based indicator that determines the (current & future) trend of an asset. This indicator examines the relationship between the stock’s closing price and its volume flow. The term “accumulation”, denotes the level for buying (demand), while “distribution”, denotes the level for selling (supply) 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.
This is done by showing the relationship between the asset’s value and the market’s proportion of buyers/sellers. The market’s bullish or bearish is decided by traders. They look for divergence between the indicator and the price.
Any increase in demand might indicate that there has been a sharp drop in asset prices. This means that sellers have lost influence while buyers have gained 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):
- First, calculate the MF multiplier using the closing, high and low prices for the asset.
The formula to multiply Money Flow:
(Closing price – Low period price) – (High period price – Closing price) / (High period price – Low period price)
- Next, calculate the money flow volume using the volume for the current period and the multiplier value calculated in the previous step.
= Money flow multiplier x period
- Add the A/D last value to the money flow volume.
A/D = = Previous A/D + Money 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. The A/D line could move in one direction or another depending on price fluctuations.
The ADL can be used to assess price patterns and perhaps predict future reversals. If the ADL is rising while the price of an asset falls, it means that there is purchasing pressure. In this case, the asset’s price may fall to the upside.
Trading gaps are not considered by the A/D line. These gaps may be ignored by the A/D indicator if they occur. The gap will not be considered if a stock’s value rises and then falls in the middle. This is because the A/D line uses closing prices. Sometimes it might be difficult for you to spot small fluctuations in volume flows. A slowdown in the pace of change might be a sign that things are not moving quickly enough to notice it until ADL levels rise.