Accumulation/Distribution is a momentum indicator which takes into account changes in price and volume together. The idea is that a change in price coupled with an increase in volume may help to confirm market momentum in the direction of the price move. In trading, ganna chart you can use the direction of the A/D indicator to confirm the strength of a price trend or identify the potential for a trend to reverse course. A bearish signal is formed when the A/D line is trending downward, but the price of the security is in an uptrend .
- Doesn’t consider trading gaps — This is mainly because the A/D indicator focuses on the closing prices.
- As with cumulative indicators, the Accumulation Distribution Line is a running total of each period’s Money Flow Volume.
- There are three steps to calculating the Accumulation Distribution Line .
- You should use it in conjunction with other indicators or patterns.
The money flow volume, combined with the previous A/D value, confirms the current price trend and helps predict the sustainability of the current trend. If the stock’s closing price is in the upper half of the High-Low, then the multiplier is positive and negative when the closing price is in the lower half. The money flow multiplier value represents the buying-selling pressure of the stock.
The interpretation of the A/D indicator is relatively easy. First, you need to ensure that you are using a chart that is trending. When price continues to make lower troughs and Accumulation Distribution fails to make lower troughs, the down trend is likely to stall or fail.
By combining the western technical analysis along with Japanese candlestick charting techniques, the AD line could be used to capture a trend successfully. In Figure B, at points 4, 5 & 8 one would have been able to take advantage of the uptrend & downtrend. On the other hand, the A/D indicator doesn’t factor in the previous close. Therefore, building winning algorithmic trading systems both indicators may provide different yet complementary information. If you’re familiar with the On-Balance Volume indicator, you know that, much like the A/D indicator, it also uses price and volume to predict market movements. The ADI line will then begin moving away from the price, indicating that a reversal may soon occur.
Disconnect with Prices
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If divergence occurs between the Accumulation/Distribution indicator and the price of the security a change in price direction is probable. When the accumulation/distribution indicator is negative, it suggests there is selling pressure on the asset, and the direction of the price could turn lower. They can help to show downward or upward trends and to monitor for trend breaks. This site allows you to add your own free-hand trend lines which will then show on any Chart for that stock. Accumulation Distribution uses volume to confirm price trends or warn of weak movements that could result in a price reversal. The A/D indicator utilizes a multiplier depending on where the price closed within the period’s range rather than considering the previous close.
Examples of Analysis Using a Combination of Indicators
Yet, there are some drawbacks to using the accumulation distribution indicator. The A/D indicator does not state changes in price between periods; hence, a series of price gaps may go undetected. Since the A/D line ties with the price movements for a period, it can cause a disconnect between the stock price and the indicator.
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.
Price disconnect — The A/D line ties with the price changes over a given period. This can cause a disconnect between the indicator and the price, especially for minor price changes. What is perhaps more interesting is when the A/D indicator and price do not agree.
Click the duration settings button, Eg ‘Daily 6 Months’ directly above the Charts to change the chart Duration or Period. To add a completely new Area click ‘Add indicator to new area’. For example, you may have a Chart with two existing Areas for Candlesticks and Volume.
How to Interpret and Use the Accumulation/Distribution Indicator
If the line is falling, it denotes a market in the distribution phase. In either case, be sure to confirm the trend direction with other technical indicators before taking up a position on the asset you’re considering. A certain share of the daily volume is added to or subtracted from the current accumulated value of the indicator. The nearer the closing price to the maximum price of the day is, the higher the added share will be.
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 investment real estate finance and asset management the advanced options. Click here for a live chart with the Accumulation Distribution Line. Accumulation Distribution looks at the proximity of closing prices to their highs or lows to determine if accumulation or distribution is occurring in the market.
The nearer the closing price to the minimum price of the day is, the greater the subtracted share will be. If the closing price is exactly in between the maximum and minimum of the day, the indicator value remains unchanged. When the indicator drops, it means distribution of the security, as most of sales take place during the downward price movement. 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.
How the Accumulation/Distribution (A/D) Indicator Works?
That’s why it’s essential to use other tools alongside your Accumulation/Distribution indicator. As we have written before, knowing how to calculate the accumulation/distribution is not always mandatory. Instead, you should strive to learn how to interpret it well.
The blue line above, in the lower window pane of the chart, represents the Accumulation/Distribution Line based on Daily data for RNWK. The Accumulation/Distribution line is seen overlaying volume bars. And then multiply the result by the Volume, and add to the cumulative total. In the customization panel you can save chart versions and make copies. If you are viewing one of your existing Charts click ‘Apply Changes’ to save or ‘Copy’ to build an additional Chart based on the one currently on display. On average, more volume was occurring on down days than up days, even while the Nasdaq 100 was making higher highs and higher lows, which usually is considered a sign of strength.