Introduction to the A/D Oscillator

In this post we introduce the Accumulation/Distribution indicator that is used across various methods of trading.

Accumulation/Distribution

The Accumulation/Distribution Line is a technical analysis indicator that assesses whether a security is being accumulated or distributed by using both price and volume. It is a volume-based indicator whose main objective is to measure underlying supply and demand. The indicator achieves this goal by attempting to determine whether traders buy (accumulation) or sell (distribution) the asset. The Accumulation/Distribution (A/D) indicator provides insight about the strength of a trend. In fact, the A/D measure identifies the divergences between the stock price and the volume flow. In practice, a rising price accompanied by a declining indicator indicates that the buying volume (accumulation) is not sufficient to support the price rise and that a price decline is around the corner. The price and volume divergences are assessed in order to affirm a current trend or anticipate a future reversal.

Calculating

ACCUMULATION/DISTRIBUTION = ((CLOSE – LOW) – (HIGH – CLOSE)) / (HIGH – LOW) * PERIOD VOLUME

[(CLOSE  -  LOW) - (HIGH - CLOSE)]/(HIGH - LOW) = MONEY FLOW MULTIPLIER

The main variable affecting the A/D to increase or decrease is the Money Flow Multiplier. The Money Flow Multiplier is affected by the relationship between a period’s closing price and the period’s high/low range. Looking at the Money Flow Multiplier formula we can conclude that its value lies between -1 and 1. When the price closes in the upper half of the high/low range, the Money Flow Multiplier will be closer to 1 signaling a high buying pressure. Equivalently, when the price closes in the lower half of the high/low range, the Money Flow Multiplier will be closer to -1 signaling a high selling pressure. A/D rises with a highly positive multiplier combined with a strong volume and falls with a highly negative multiplier combined with a strong volume. Thus, the A/D line becomes a sensor of buying (accumulation) and selling (distribution) pressure, making it a helpful tool in confirming trends and anticipating reversals.

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