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. 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.
- The Accumulation Distribution Line can be used to gauge the general flow of volume.
- The Accumulation/Distribution Indicator is a volume-measurement tool that assesses the cumulative inflow and outflow of money of a given security.
- The multiplier is +1 when the close is on the high and -1 when the close is on the low.
The A/D line denotes a running total of the money flow volume for a given period. First, we calculate a multiplier based on the closing high-low range. We then multiply this value by the volume for that period, which gives us the Money Flow Volume. When the close is in the upper half of the high-low range, the multiplier is positive, which indicates that the buying pressure is strong enough. The accumulation/distribution is one of the most common technical indicators in the market.
Conversely, if the price is going up but the A/D indicator is falling, it could mean that the price has a good chance of going down (i.e., there may be a bearish reversal soon). The Accumulation/Distribution Indicator (A/D) is an indicator that any technical trader should understand. Paired with the right risk management tools, it could help you better interpret trends, reversals, as well as gain valuable insight into market behavior. When the Accumulation Distribution Line is rising together with the price, it confirms the uptrend. When the ADL line is falling together with the falling price it supports the downtrend. Yet, there are some drawbacks to using the accumulation distribution indicator.
Third, create a running total of Money Flow Volume to form the Accumulation Distribution Line (ADL). The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in. Breaking down the Accumulation Distribution formula, you’ll see that it is a single line tool, which belongs to the oscillator family and fluctuates around a zero (0.00) level.
Accumulation/Distribution Indicator vs. On-Balance Volume
The number of shares traded is relative to the rise and fall of its stock price. The A/D indicator, like other volume indicators, predicts the direction of the volume flow. It helps determine future stock price movements and hence provides an edge. 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.
Click here for a live chart with the Accumulation Distribution Line. 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.
How to use Level 2 Data to Trade at a Higher Tier!
The Accumulation Distribution Line moved higher because the close was near the high of the day. 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. 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. Traders need to monitor the price chart and mark any potential anomalies like these, as they could affect how the indicator is interpreted. The A/D indicator does not factor in price changes from one period to the next, and focuses only on where the price closes within the current period’s range. The same concepts apply when the price closes in the lower portion of the period’s price range.
- This is where a trader sells an asset when the A/D indicator is falling.
- As the formula above shows, Chaikin took a different approach by completely ignoring the change from one period to the next.
- The A/D indicator, like other volume indicators, predicts the direction of the volume flow.
- Due to current legal and regulatory requirements, United States citizens or residents are currently unable to open a trading office with us.
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.
Disconnect with Prices
The Accumulation/Distribution indicator is a useful tool for measuring buying and selling pressure in the market. Plus, it is a fantastic indicator for confirming or contradicting current trends. Remember to use the A/D indicator in conjunction with other technical tools. This way, you could be more confident in your next trading move. We measure the A/D line in relation to the price trend and then either confirms or contradicts it.