Definition of ‘Accumulation/Distribution Indicator’ - The accumulation/distribution indicator is used in technical analysis to determine the direction of an asset price based on its trading volume.
What is the accumulation/distribution indicator?
Accumulation/Distribution Indicator Definition - The accumulation/distribution (A/D) line is a cumulative, volume-based indicator that looks at the direction of trading volume to ascertain whether an asset is being accumulated/bought or distributed/sold, and what that indicates about the direction of the asset price.
The accumulation/distribution (A/D) indicator was developed by Marc Chaikin, who initially called it the Cumulative Money Flow Line.
The momentum indicator is used in technical analysis of stocks and other assets to determine the level of buying and selling activity and predict the future price trend.
The indicator is based on the relation between the volume flow, or money flow, and the rise and fall of an asset price. The line moves above and below zero on a price chart. It is used to identify divergences between the volume and the price that indicate entry and exit points for trading positions.
The formula used to calculate the accumulation/distribution line on a chart consists of three parts that compare the closing price with the high and low ends of the price range for the period and multiply it by the trading volume over the same period. It does not look at the price change between different periods.
Chaikin also developed the Chaikin Oscillator, which measures the momentum of the accumulation distribution line of the moving average convergence-divergence (MACD) indicator.
How do you trade with the accumulation distribution indicator?
In trading, 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.
If the A/D line and the asset price are moving higher on the chart, they are likely to remain in an upward trend, presenting a buying opportunity. But if the price and A/D line trend lower, they are likely to remain in a downward trend, indicating you could sell or short the asset.
If the price is trending higher on the chart but the accumulation/distribution line is falling, there could be higher distribution volume, or selling pressure, and the bearish divergence indicates that the price could reverse to the downside. And if the price is trending lower with the A/D line rising, the bullish divergence indicates that buying interest could see the price break out to the upside.
Divergences in the A/D line can point to trend reversals before other technical analysis indicators and help you to maximize your profit from trading positions. However, as the A/D line is removed from the asset price, there can sometimes be a disconnect between the indicator and price action. As with any technical analysis tools, you should not use the A/D line alone but compare it with other indicators and chart patterns for confirmation.
What does it mean when accumulation/distribution is negative?
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.
How do you know if a stock is under accumulation?
If the A/D line is moving higher on a chart, it indicates the asset is under accumulation, and buying interest is increasing. That could present an opportunity to buy the asset ahead of further gains in the price.