What Is The Accumulation / Distribution Indicator & How To Trade With It

Accumulation Distribution Indicator Explained

The change in price and volume determines the Accumulation / Distribution. Volume acts as a weighting factor when the price changes: the larger the coefficient (volume), the higher the contribution of the price change (over a given period) to the indicator value.

This indicator is a variant of the more common On Balance Volume indicator. Both are used to confirm price changes by measuring the appropriate trading volume.

What is the Accumulation / Distribution (A / D) indicator?

The growth of the Accumulation / Distribution (A / D) indicator means the accumulation (purchase) of the asset since the overwhelming share of trading volume is associated with an upward movement in prices. When the indicator falls, it means the Distribution (sale) of the asset, since the overwhelming share of trading volume is associated with a downward movement of prices.

The discrepancies between the Accumulation / Distribution indicator and the paper price indicate an upcoming price change. Usually, in the event of a discrepancy, the price trend changes in the direction the indicator moves. So, if the indicator rises, and the price of asset falls, then we should expect a price reversal.

Accumulation Distribution indicator
Accumulation Distribution indicator

The volume of transactions acts as a weighting factor when the price changes – the more significant the volume, the greater the contribution of the price change (over a given period) to the indicator value.

Thus, when calculating the Accumulation / Distribution indicator, each subsequent value is added to the previous one, and the previous one is the sum of the remaining previous ones; this indicator calculation is slightly similar to the exponential moving average.

It is believed that on a growing trend, most of the closing prices are closer to the maximum price of the trading period. Moreover, with the involvement of more and more traders in the trend, it leads to an increase in the volume of traded securities or currencies. The opposite happens in a declining trend with the price. However, this is also accompanied by an increase in volume or at least an excess of the average values ​​of the volume.

Thus, this indicator is a good measure of what economic forces are behind the current market trend. As an indicator of volume, Accumulation / Distribution line really allows you to determine when the volume of transactions increases, while buying or selling a financial asset.

The growth of the indicator means that at the moment, the pressure of buyers is much higher, and the drop of the indicator indicates that the pressure of sellers is much higher.

The Accumulation / Distribution Line indicator can be used to find divergences of various types. The Accumulation / Distribution line indicator can also be used to confirm the strength behind the current movement.

How to use the Accumulation / Distribution indicator?

On a growing trend, the AD indicator should increase. On a falling trend, it should fall, i.e., a new peak in the price chart should be confirmed.

Bullish divergence indicates the weakness of a growing trend; a bearish convergence signals the weakness of the falling trend.

On the chart of the Accumulation Distribution indicator, you can apply the same graphic techniques as on the price chart. For example, a breakdown of a trend line on the AD indicator indicates a near breakdown of a trend line on a price chart.

Accumulation Distribution trendline breakout
Accumulation Distribution trendline breakout

Accumulation / Distribution disadvantages

The indicator does not take gaps into account. If an asset opens with a gap up and closes midway between the low and high, the Accumulation Distribution indicator will not take into account the gap itself. In the case of a series of gaps, this introduces a significant error in the calculations.

Since the Accumulation / Distribution indicator closely repeats price movements, especially the closing price, it sometimes moves in the same way as the asset it is considered for. Therefore, it skips a series of discrepancies.

In some cases, it is difficult enough to detect subtle changes in volumes. For example, the speed of a downtrend may slow down, but it may not be possible to determine until the Accumulation / Distribution indicator reverses.

Accumulation / Distribution trading strategy

Following are the parameters for this trading strategy:

Timeframe : 1-hour or higher

Currency pairs: any

Confirmatory indicator: SMA (20)

If the A/D indicator starts rising from the bottom and the price on chart also starts rising after consolidation, then this is called accumulation and it indicates that the fresh buying has started. We can go with the flow and may buy the asset. For confirmation, the price should be above SMA (20). Look at the chart below:

Accumulation Distribution buy signal
Accumulation Distribution buy signal

Similarly, if an uptrend halts and the price starts consolidating, then wait for the A/D indicator to start falling. The price should be well below the SMA (20). This is call distribution phase. Look at the chart below:

Accumulation Distribution sell signal
Accumulation Distribution sell signal

Accumulation / Distribution conclusion

Traders may use the Accumulation / Distribution indicator to obtain the necessary data and analyze the current market situation. It uses prices and volumes to assess whether a trading instrument is being accumulated or distributed. Despite all the advantages of the A / D indicator, it also has a drawback, for example, incorrectly reflects the price gap. This is because A / D is not able to analyze past candles.