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Accumulation/Distribution Indicator — A/D Definition and Uses
What is the Accumulation/Distribution Indicator (A/D)?
Accumulation/distribution is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed. The accumulation/distribution measure seeks to identify divergences between the stock price and volume flow. This provides insight into how strong a trend is. If the price is rising but the indicator is falling this indicates that buying or accumulation volume may not be enough to support the price rise and a price decline could be forthcoming.
- The accumulation/distribution line gauges supply and demand by looking at where the price closed within the period’s range, and then multiplying that by volume.
- The A/D indicator is cumulative, meaning one period’s value is added or subtracted from the last.
- A rising A/D line helps confirm a rising price trend.
- A falling A/D line helps confirm a price downtrend.
- If the price is rising but A/D is falling, it signals underlying weakness and a potential decline in price.
- If the price of an asset is falling but A/D is rising, it signals underlying strength and the price may start to rise.
The Formula for the Accumulation/Distribution Indicator is
How to Calculate the Accumulation/Distribution Line
- Start by calculating the multiplier. Note the most recent period’s close, high, and low to calculate.
- Use the multiplier and the current period’s volume to calculate the Money Flow Volume.
- Add the Money Flow Volume to the last A/D value. For the first calculation use Money Flow Volume as the first value.
- Repeat the process as each period ends, adding/subtracting the new Money Flow Volume to/from the prior total. This is A/D.
What Does the Accumulation/Distribution Indicator Tell You?
The accumulation/distribution line helps to show how supply and demand factors are influencing price. A/D can move in the same direction as price changes or it may move in the opposite direction.
The multiplier in the calculation provides a gauge for how strong the buying or selling was during a particular period. It does this by determining whether the price closed in the upper or lower portion of its range. This is then multiplied by the volume. Therefore, when a stock closes near the high of the period’s range, and has high volume, that will result in a large A/D jump. If the price finishes near the high of the range but volume is low, the A/D will not move up as much. If volume is high but the price finishes more toward the middle of the range, the A/D will also not move up as much.
The same concepts apply when the price closes in the lower portion of the period’s price range. Both volume and where the price closes within the period’s range determine how much the A/D will decline by.
The accumulation/distribution line is used to help assess price trends and potentially spot forthcoming reversals.
If a security’s price is in a downtrend while the accumulation/distribution line is in an uptrend, the indicator shows there may be buying pressure and the security’s price may reverse to the upside.
Conversely, if a security’s price is in an uptrend while the accumulation/distribution line is in a downtrend, the indicator shows there may be selling pressure, or higher distribution. This warns that the price may be due for a decline.
In both cases, the steepness of the accumulation/distribution line provides insight into the trend. A strongly rising A/D line confirms a strongly rising price. Similarly, if the price is falling and the A/D is also falling, then there is still plenty of distribution and prices are likely to continue to decline.
The Difference Between the Accumulation/Distribution Indicator and On Balance Volume (OBV)
Both these indicator use price and volume, although they use it differently. On Balance Volume (OBV) looks at whether the current closing price is higher or lower than the prior close. If the close is higher, the period’s volume is added. If the close is lower, then the period’s volume is subtracted. The A/D indicator doesn’t factor in the prior close, and uses a multiplier based on where within the period’s range the price closed. Therefore, the indicators use different calculations and may provide different information.
Limitations of Using the Accumulation/Distribution Indicator
The A/D indicator does not factor in price changes from one period to the next, it only factors where the price closes within the current period’s range. This creates some anomalies. Assume a stock gaps down 20% on huge volume. The price oscillates throughout the day and finishes in the upper portion of its daily range, but is still down 18% from the prior close. Such a move would actually cause the A/D rise. Even though the stock lost a significant amount of value, because it finished in the upper portion of its daily range the indicator will increase, likely dramatically, due to the large volume.
Therefore, traders need to monitor the price chart and mark any potential anomalies like these as they could affect how the indicator is interpreted.
Also, one of the main uses of the indicator is to monitor for divergences. Divergences can last a long time and are poor timing signals. When divergence appears between the indicator and price it doesn’t mean a reversal is imminent. It may take a long time for the price to reverse, or it may not reverse at all. The A/D is just one tool that can be used to assess strength or weakness within a trend, but it is not without its faults.
Use the A/D indicator in conjunction with other forms of analysis, such as price action analysis, chart patterns, or fundamental analysis to get a more complete picture of what is moving the price of a stock.
Accumulation Distribution Line
Table of Contents
Accumulation Distribution Line
Developed by Marc Chaikin, the Accumulation Distribution Line is a volume-based indicator designed to measure the cumulative flow of money into and out of a security. Chaikin originally referred to the indicator as the Cumulative Money Flow Line. As with cumulative indicators, the Accumulation Distribution Line is a running total of each period’s Money Flow Volume. First, a multiplier is calculated based on the relationship of the close to the high-low range. Second, the Money Flow Multiplier is multiplied by the period’s volume to come up with a Money Flow Volume. A running total of the Money Flow Volume forms the Accumulation Distribution Line. Chartists can use this indicator to affirm a security’s underlying trend or anticipate reversals when the indicator diverges from the security price.
There are three steps to calculating the Accumulation Distribution Line (ADL). First, calculate the Money Flow Multiplier. Second, multiply this value by volume to find the Money Flow Volume. Third, create a running total of Money Flow Volume to form the Accumulation Distribution Line (ADL).
The Money Flow Multiplier fluctuates between +1 and -1. As such, it holds the key to the Money Flow Volume and the Accumulation Distribution Line. The multiplier is positive when the close is in the upper half of the high-low range and negative when in the lower half. This makes sense, as buying pressure is stronger than selling pressure when prices close in the upper half of the period’s range (and vice versa). The Accumulation Distribution Line rises when the multiplier is positive and falls when the multiplier is negative.
The multiplier adjusts the amount of volume that ends up in the Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1). The multiplier is +1 when the close is on the high and -1 when the close is on the low. All volume is positive when +1 and all volume is negative when -1. At .50, only half of the volume translates into the period’s Money Flow Volume. The table below shows the Money Flow Multipliers, Money Flow Volume and Accumulation Distribution Line for Research-in-Motion (RIMM). Notice how the multiplier is between .50 and 1 when the close is strong and between -.50 and -1 when the close is weak.
Click here for a calculation of the Accumulation Distribution Line in an Excel Spreadsheet.
The Accumulation Distribution Line is a cumulative measure of each period’s volume flow, or money flow. A high positive multiplier combined with high volume shows strong buying pressure that pushes the indicator higher. Conversely, a low negative number combined with high volume reflects strong selling pressure that pushes the indicator lower. Money Flow Volume accumulates to form a line that either confirms or contradicts the underlying price trend. In this regard, the indicator is used to either reinforce the underlying trend or cast doubts on its sustainability. An uptrend in prices with a downtrend in the Accumulation Distribution Line suggests underlying selling pressure (distribution) that could foreshadow a bearish reversal on the price chart. A downtrend in prices with an uptrend in the Accumulation Distribution Line indicate underlying buying pressure (accumulation) that could foreshadow a bullish reversal in prices.
ADL versus OBV
The Accumulation Distribution Line and On Balance Volume (OBV) are cumulative volume-based indicators that sometimes move in opposite directions because their basic formulas are different. Joe Granville developed On Balance Volume (OBV) as a cumulative measure of positive and negative volume flow. OBV adds a period’s total volume when the close is up and subtracts it when the close is down. A cumulative total of this positive and negative volume flow forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation.
As the formula above shows, Chaikin took a different approach by completely ignoring the change from one period to the next. Instead, the Accumulation Distribution Line focuses on the level of the close relative to the high-low range for a given period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Accumulation Distribution Line would rise if the close were above the midpoint of the high-low range. The chart above shows Clorox (CLX) with a big gap down and a close near the top of the day’s high-low range. OBV moved sharply lower because the close was below the prior close. The Accumulation Distribution Line moved higher because the close was near the high of the day.
Trend confirmation is a pretty straight-forward concept. An uptrend in the Accumulation Distribution Line reinforces an uptrend on the price chart and vice versa. The chart below shows Freeport McMoran (FCX) and the Accumulation Distribution Line advancing in February-March, declining from April to June and then advancing from July to January. The Accumulation Distribution Line confirmed each of these price trends.
Bullish and bearish divergences are where it starts getting interesting. A bullish divergence forms when price moves to new lows, but the Accumulation Distribution Line does not confirm these lows and moves higher. A rising Accumulation Distribution Line shows, well, accumulation. Think of this as basically stealth buying pressure. Based on the theory that volume precedes price, chartists should be on alert for a bullish reversal on the price chart.
The chart above shows Nordstrom (JWN) with the Accumulation Distribution Line. Notice how it is easy to compare price action when the indicator is placed “behind” the price plot. The indicator (pink) and the price trend moved in unison from February to June. Signs of accumulation emerged as the indicator bottomed in early July and started moving higher. JWN moved to a new low in late August. Even though the indicator showed signs of buying pressure, it was important to wait for a bullish catalyst or confirmation on the price chart. This catalyst came as the stock gapped up and surged on big volume.
A bearish divergence forms when price moves to new highs, but the Accumulation Distribution Line does not confirm and moves lower. This shows distribution or underlying selling pressure that can foreshadow a bearish reversal on the price chart.
The chart above shows Southwest Airlines (LUV) with the Accumulation Distribution Line peaking two months ahead of prices. The indicator not only peaked, but it also moved lower in March and April, which reflected some selling pressure. LUV confirmed weakness with a support break on the price chart and RSI moved below 40 shortly afterward. RSI often trades in bull zones (40-80) and bear zones (20-60). RSI held in the bull zone until early May and then moved into a bear zone.
Disconnect with Prices
The Accumulation Distribution Line is an indicator based on a derivative of price and volume. This makes it at least two steps removed from the actual price of the underlying security. Moreover, the Money Flow Multiplier does not take into account price changes from period to period. As such, it cannot be expected to always affirm price action or successfully predict price reversals with divergences. Sometimes there is a disconnect between prices and the indicator. Sometimes the Accumulation Distribution Line simply doesn’t work. This is why it is vitally important to use the Accumulation Distribution Line, and all indicators for that matter, in conjunction with price/trend analysis and/or other indicators.
The Accumulation Distribution Line can be used to gauge the general flow of volume. An uptrend indicates that buying pressure is prevailing on a regular basis, while a downtrend indicates that selling pressure is prevailing. Bullish and bearish divergences serve as alerts for a potential reversal on the price chart. As with all indicators, it is important to use the Accumulation Distribution Line in conjunction with other aspects of technical analysis, such as momentum oscillators and chart patterns. It is not a standalone indicator.
Using with SharpCharts
The Accumulation Distribution Line is available in SharpCharts as an indicator. After selecting, the indicator can be positioned above, below or behind the price of the underlying security. Positioning “behind price” makes it easy to compare with the underlying security. Chartists can also add a moving average to the indicator by using the advanced options. Click here for a live chart with the Accumulation Distribution Line.
Bullish Divergence in OBV and ADL
This scan starts with a base of stocks that are averaging at least $10 in price and 100,000 daily volume over the last 60 days. Potential bullish divergences are found by looking for stocks where price is BELOW the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are ABOVE the 65-day SMA and 20-day SMA.
Bearish divergence in OBV and ADL
This scan starts with a base of stocks that are averaging at least $10 in price and 100,000 daily volume over the last 60 days. Potential bearish divergences are found by looking for stocks where price is ABOVE the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are BELOW the 65-day SMA and 20-day SMA.
For more details on the syntax to use for Accumulation Distribution Line scans, please see our Scanning Indicator Reference in the Support Center.
Note: For the purposes of scanning, daily volume data is incomplete during the trading day. When running scans with volume-based indicators like Accumulation/Distribution, be sure to base the scan on the “Last Market Close.” Examples of other volume-based indicators include Chaikin Money Flow, On Balance Volume, and the PVO.
John Murphy’s Technical Analysis of the Financial Markets covers it all with explanations that are simple and clear. Murphy covers most the major charts patterns and indicators. A complete chapter is devoted to understanding volume and open interest.
Accumulation Distribution tracks the relationship between price and volume and acts as a leading indicator of price movements. It provides a measure of the commitment of bulls and bears to the market and is used to detect divergences between volume and price action — signs that a trend is weakening.
Accumulation Distribution is an enhancement of the On Balance Volume indicator. It first compares opening and closing prices to the trading range for the period, the result is then used to weight the volume traded.
The strongest signals on the Accumulation Distribution are divergences:
- Go long when there is a bullish divergence.
- Go short when there is a bearish divergence.
Stop-losses should be placed below the most recent low (when going long) and above the latest high (when going short).
Microsoft is plotted with Accumulation Distribution. Divergences are shown by trendlines.
Mouse over chart captions to display trading signals.
- Go long [L]. The bullish divergence correctly predicted the subsequent rally.
- Go short [S]. The bearish divergence signaled the correction in January.
- Go short [S]. The bearish divergence signaled the correction in April.
Indicator Panel provides directions on how to set up an indicator. Edit Indicator Settings to change the default settings.
Accumulation Distribution Formula
The Accumulation Distribution Index is calculated as follows:
Closing Price is compared to Opening Price:
And compared to the day’s range:
(Close — Open) / (High — Low)
The result is multiplied by Volume for the day:
(Close — Open) / (High — Low) * Volume
Some charting software use a simpler formula where the Open price is not available:
The Close is compared to the day’s range rather than to the Opening Price.
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Бонус за регистрацию 750$!
Быстрое открытие счета + 500 $ в подарок!