Accumulation/Distribution (A/D) Indicator Purpose
Accumulation/Distribution indicator is a volume-based technical analysis tool created by Marc Chaikin. It intends to help the traders for revealing the increasing inflows and outflows of money. A/D technical indicator is determined by the changes in price and volume. In fact, A/D technical indicator is another variant of the more commonly used tool On Balance Volume. Both they are used to confirm the price changes by measuring the respective volume of sales.
- When the A/D grows, it means accumulation (buying) of a particular security, as the remarkable share of the sales volume is related to a rising trend of prices.
- When the A/D drops, it means distribution (selling) of the security, as the largest part of sales take place during the downward price movement.
- The divergences between the A/D technical indicator and the market price of the security show the upcoming change of prices.
Accumulation/Distribution (A/D)Indicator Usage
Accumulation/Distribution indicator line is used to confirm a trend or possible reversal points.
Trend is confirmed if:
- A/D line is rising, so an uptrend in prices is confirmed. The financial instrument is accumulated
- A/D line is falling, so a downtrend in prices is confirmed. The financial instrument is distributed
Divergence model analysis:
- Rising A/D line along with the falling prices means the downtrend may be weakening to a bullish reversal,
- Falling A/D line along with increasing prices means the uptrend may be weakening to a bearish reversal.
Accumulation/Distribution Indicator Calculation
Accumulation/Distribution (A/D) is momentum indicator that measures if investors are generally buying (accumulation) or selling (distribution) by evaluating the volume of price movement.
A/D(t) = [((C – L) – (H – C)) / (H – L)] x Vol + A/D(t-1),
A/D(t) – current Accumulation/Distribution value;
A/D(t-1) – previous Accumulation/Distribution value;
H – current high;
L – current low;
C – close price;
Vol – volume.