Accumulation/Distribution

Accumulation/ Distribution
Technical Indicator
Accumulation/Distribution
Accumulation/Distribution
INTRODUCTION AND HISTORY

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. The accumulation/distribution line or accumulation/ distribution index (ADL), formulated by Marc Chaikin is a technical analysis indicator meant to relate price and volume in the stock market and also works like a leading indicator of price movements. Actually, this indicator is a variant of the more widely used indicator On Balance Volume. They are both used to confirm price changes by way of calculating the respective volume of sales. If a security is in a strong downtrend or uptrend, the accumulation/distribution most likely follows the direction of the price movements, and therefore, confirms the downtrend or uptrend.

Definition

Accumulation Distribution Indicator or ADL (Accumulation Distribution Line) is a volume based indicator which was essentially designed to measure underlying supply and demand. It accomplishes this by trying to determine whether traders are actually accumulating (buying) or distributing (selling). This is accomplished by plotting a running total of each period’s Money Flow Volume. ADL can reveal divergences between volume flow and actual price to primarily either affirm a current trend or to anticipate a future reversal.

What the A/D indicator Actually Measures

The accumulation distribution oscillator assesses the flow of money into and out of a financial instrument by looking at both the trading range, and the trading volume over a given period. There are three main steps to the A/D indicator calculation. The first step calculates the close location value (CLV). The CLV compares the closing price for a given period, to the range over that period, and it can vary in value from -1 to +1. If the close of the period is also the low of the period, then the CLV will be -1. If the close is the high of the period, then the CLV will be +1. For any other values, the CLV will lie somewhere between these two extremes.

Accumulation/Distribution = ((Close – Low) – (High – Close)) / (High – Low) * Period Volume

In order to fully understand how the indicator actually works, it is necessary to break this formula down into individual parts.

1. Find the Money Flow Multiplier.
((Close – Low) – (High – Close))/(High – Low) = Money Flow Multiplier

2. Once you have calculated the Money Flow Multiplier, you can calculate Money Flow Volume.
Money Flow Multiplier * Period’s Volume = Money Flow Volume

3. As previously mentioned The ADL is a running total of each period’s Money Flow Volume. Therefore once you have the Current Money Flow Volume you can plot the ADL.
ADL = Previous ADL + Current Money Flow Volume

What the A/D indicator Actually Measures

The accumulation distribution oscillator assesses the flow of money into and out of a financial instrument by looking at both the trading range, and the trading volume over a given period. There are three main steps to the A/D indicator calculation. The first step calculates the close location value (CLV). The CLV compares the closing price for a given period, to the range over that period, and it can vary in value from -1 to +1. If the close of the period is also the low of the period, then the CLV will be -1. If the close is the high of the period, then the CLV will be +1. For any other values, the CLV will lie somewhere between these two extremes.

● The CLV is calculated as follows:
CLV = [(close – low) – (high -close)] (high- low)
The second step is to multiply the CLV by the volume over the period, to give us a measure of money flow over the period. A negative value is money flowing out, and a positive value is money flowing in.

● So, the money flow = CLV x volume.
The final step is to calculate this value over multiple periods, and this cumulative total gives us our accumulation/distribution index.

● That is: The current A/D value = previous A/D value + current
value for (CLV x volume).
So put simply, the accumulation distribution line consists of a running total of money flows in and out of the instrument we are looking at. Now, if the idea of performing all these calculations seems daunting, don’t worry! The beauty of modern trading platforms is that no matter how complicated the calculations behind an indicator may be, you get the results displayed instantaneously.

The basics

When breaking down the formula, what ultimately causes the ADL to rise or fall is the Money Flow Multiplier. The Money Flow Multiplier is determined by the relationship between a period’s closing price and the period’s high/low range. The Money Flow Multiplier is always within a range of 1 and -1. When a period closes in the upper half of the high/low range, the Money Flow Multiplier will rise closer to 1. On the other hand, when a period closes in the lower half of the high/low range, the Money Flow Multiplier will fall towards -1. The closer the multiplier is to 1, the higher the buying pressure. So when you combine a highly positive multiplier with strong volume the
ADL will rise. When you combine a highly negative multiplier with strong volume, selling pressure will rise and the ADL will fall. Therefore ADL can be seen as a way of measuring the strength of buying and selling (accumulation and distribution) pressure. With this in mind, ADL becomes a valuable tool in both confirming trends as well as anticipating reversal.

How this indicator works
  • When both price and Accumulation Distribution are making higher peaks, the upward trend is confirmed.
  • When both price and Accumulation Distribution are making lower peaks, the downward trend is likely to continue.
  • During a trading range, rising Accumulation Distribution indicates accumulation may be taking place and hence chances of an upward breakout.
  • During a trading range, falling Accumulation Distribution indicates distribution may be taking place and hence chances of downward breakout.
  • When price continues to make higher peaks and Accumulation Distribution fails to make higher peaks, the upward trend is likely to stall or fail. This is called a negative divergence.
  • When price continues to make lower troughs and Accumulation Distribution fails to make lower peaks, the downward trend is likely to stall or fail. This is called a positive divergence.
Use with other indicators

The accumulation distribution indicator is commonly employed to confirm the predictions of other indicators such as the relative strength index that helps traders decide if a stock is overbought or oversold. It measures the speed (velocity) as well as the change (magnitude) of directional price movements. It is also used with the money flow index. This is a momentum indicator that measures the flow of money into and out of a security over a specified period of time. It can identify the current strength or weakness of a trend. The accumulation distribution indicator is sometimes confused with the similarly-named Williams accumulation distribution Indicator that looks only at price and therefore fails to take into account volume.

Leave a Comment

Your email address will not be published. Required fields are marked *