The Accumulation/Distribution (A/D) Indicator is a crucial tool for traders, focusing on price changes and trading volume. Essentially, this indicator weighs price changes against trading volume—higher volumes mean that price shifts hold more significance in determining the indicator's value.
Accumulation/Distribution, A/D
Think of the A/D Indicator as a sibling to the more widely recognized On Balance Volume (OBV) indicator. Both serve to validate price movements by analyzing trading volumes.
When you see the A/D indicator on the rise, it signals accumulation or buying interest in a security, suggesting that most of the trading volume is linked to increasing prices. Conversely, a declining A/D indicates distribution or selling pressure, where the bulk of the trading happens during falling prices.
Keep an eye on divergences between the A/D and the price of a security. These discrepancies often foreshadow potential price shifts. For instance, if the A/D is climbing while the price is dropping, it’s a hint that a price reversal might be on the horizon.
How to Calculate the A/D Indicator
The calculation involves adding or subtracting a portion of the daily volume to/from the current accumulated value of the A/D indicator. 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 is subtracted. If it’s smack dab in the middle, the indicator remains unchanged.
A/D(i) = ((CLOSE(i) - LOW(i)) - (HIGH(i) - CLOSE(i)) * VOLUME(i) / (HIGH(i) - LOW(i)) + A/D(i-1)
Where:
A/D(i) — the value of the A/D indicator for the current bar;
CLOSE(i) — the closing price of the bar;
LOW(i) — the lowest price of the bar;
HIGH(i) — the highest price of the bar;
VOLUME(i) — the volume of trades;
A/D(i-1) — the A/D indicator value for the previous bar.
Further Reading
If you want to dive deeper into the A/D indicator, check out the full description in the Technical analysis: Accumulation/Distribution section.
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