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 accumulated or distributed. The accumulation / distribution measure aims to identify the discrepancies between the share price and the volume flow. This gives a glimpse of the strength of a trend. If the price increases but the indicator decreases, this indicates that the volume of purchase or accumulation may not be enough to support the price increase and that a price decrease may occur.
- The accumulation / distribution line assesses supply and demand by examining the closing of the price in the range of the period, then multiplying that by the volume.
- The A / D indicator is cumulative, which means that the value of a period is added to or subtracted from the last.
- A rising A / D line confirms an upward price trend.
- A drop in the A / D line confirms a downward trend in prices.
- If the price goes up but the A / D goes down, it signals an underlying weakness and a potential price drop.
- If the price of an asset goes down but A / D goes up, that signals an underlying force and the price can start to go up.
The formula for the accumulation / distribution indicator is
TheA D=Previous A / D+DTECor:DTEC=Current volume of cash flowsDTEC=PHThe–PTheThe(PVSThe–PTheThe)–(PHThe–PVSThe)The×VPVSThe=The last pricePTheThe=Low price for the periodPHThe=High price for the periodV=Volume for the periodTheThe
How to calculate the accumulation / distribution line
- Start by calculating the multiplier. Note the most recent period close, up and down to calculate.
- Use the current period’s multiplier and volume to calculate the volume of cash flow.
- Add the cash flow volume to the last A / N value. For the first calculation, use Money Flow Volume as the first value.
- Repeat the process at the end of each period, adding / subtracting the new volume of cash flow to / from the previous total. It is A / D.
What does the accumulation / distribution indicator tell you?
The accumulation / distribution line shows how the supply and demand factors influence prices. A / D can move in the same direction as the price changes or it can move in the opposite direction.
The multiplier in the calculation provides an indicator of the strength of buying or selling during a given period. He does this by determining whether the price has closed in the upper or lower part of his interval. This is then multiplied by the volume. Therefore, when a stock closes near the highest of the period range and has a high volume, this will cause a large A / N jump. If the price ends near the top of the range but the volume is weak, the A / D will not go up as much. If the volume is high but the price ends more towards the middle of the range, the A / D will not go up as much.
The same concepts apply when the price closes in the lower part of the price range for the period. The volume and closing of the price within the period range determines how much A / D will fall.
The accumulation / distribution line is used to help assess price trends and potentially spot future reversals.
If the price of a security is in a downward trend while the accumulation / distribution line is in an upward trend, the indicator shows that there may be buying pressure and that the price of the stock can reverse upwards.
Conversely, if the price of a security is in an upward trend while the accumulation / distribution line is in a downward trend, the indicator shows that there may be more selling pressure or more distribution. high. This warns that the price may be due to a drop.
In both cases, the slope of the accumulation / distribution line gives an overview of the trend. A sharply rising A / D line confirms a sharp rise in prices. Likewise, if the price goes down and A / D goes down too, there is still a lot of distribution and prices should continue to go down.
The difference between the accumulation / distribution indicator and the equilibrium volume (OBV)
These two indicators use price and volume, although they use it differently. Balance volume (OBV) examines whether the current closing price is higher or lower than the previous closing. If the closing is higher, the volume of the period is added. If the closing is lower, the volume of the period is subtracted. The A / D indicator does not take into account the previous closing and uses a multiplier based on the place in the range of the period when the price closed. Therefore, indicators use different calculations and can provide different information.
Limits of using the accumulation / distribution indicator
The A / D indicator does not take into account price variations from one period to another, it only takes into account the closing of the price within the range of the current period. This creates anomalies. Suppose a stock gaps down 20% on a huge volume. The price fluctuates throughout the day and ends at the top of its daily range, but is still down 18% from the previous close. Such a decision would in fact result in A / D ascend. Even if the stock has lost a significant amount of value as it finished near the top of its daily range, the indicator will probably increase dramatically due to the large volume.
Therefore, traders should monitor the price graph and mark any potential anomalies like these, as they could affect the way the indicator is interpreted.
In addition, one of the main uses of the indicator is to monitor discrepancies. Discrepancies can last a long time and are bad timing signals. When a divergence appears between the indicator and the price, this does not mean that a reversal is imminent. It may take a long time for the price to reverse, or it may not reverse at all. A / D is just a tool that can be used to assess the strength or weakness of 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 models or fundamental analysis to get a more complete picture of what drives the price of a stock.