The Accumulation/Distribution (A/D) indicator is a powerful tool that traders use to gauge the relationship between price movement and trading volume. Simply put, it weighs price changes against the volume of trades. The larger the volume, the bigger the impact on the indicator's value.
Think of it this way: the A/D indicator is a cousin of the widely-known On Balance Volume (OBV). Both indicators serve to confirm price trends by analyzing the volume of trades.
When you see the A/D indicator rising, it suggests that investors are accumulating (or buying) the asset, as most of the trading volume is happening during an upward price trend. Conversely, when the A/D indicator dips, it signals distribution (or selling), indicating that a majority of trades occur as prices fall.
Divergences between the A/D indicator and the asset’s price can hint at potential market reversals. For example, if the A/D is climbing while the price is falling, you might want to brace for a price turnaround.
How to Calculate the A/D Indicator:
To compute the A/D value, a portion of the day’s volume gets added to or subtracted from the previous indicator value. If the closing price is closer to the day’s high, more volume is added; if it’s closer to the day’s low, more volume is deducted. If the closing price lands right in the middle, the indicator remains unchanged.
Where:
- A/D(i) - the current value of the Accumulation/Distribution indicator;
- CLOSE(i) - the closing price of the current bar;
- LOW(i) - the lowest price of the current bar;
- HIGH(i) - the highest price of the current bar;
- VOLUME(i) - the trading volume;
- A/D(i-1) - the value of the A/D indicator from the previous bar.
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