Using the Accumulation/Distribution Indicator to Predict Market Movements

Accumulation/Distribution Indicator: How to Identify Market Reversals with Divergence and Trading Volume

 

Hello. The key to successful trading in financial markets lies in acquiring a good education and practicing extensively. Fortunately, today we have easier access to all of these. We can obtain financial knowledge using the internet. Mathematical technical analysis is known as the basis for Forex trading. In technical analysis, technical indicators are mostly preferred. This article is about one of these technical indicators, the Accumulation/Distribution (A/D) indicator.


What is the Accumulation/Distribution indicator?

The Accumulation/Distribution (A/D) indicator was developed by American technical analyst J. Welles Wilder Jr. to measure buying and selling pressure on an asset. Wilder introduced the A/D indicator in his 1978 book, "New Concepts in Technical Trading Systems." This indicator assists in making trading decisions by analyzing the price movements and trading volume of an asset. The Accumulation/Distribution indicator is used to monitor the accumulation and distribution of an asset. It works by comparing changes in price movements with changes in trading volume. When the price is rising and the trading volume is increasing, it indicates an increase in buying pressure. Conversely, when the price is falling and the trading volume is increasing, it indicates an increase in selling pressure.


How is the Accumulation/Distribution indicator calculated?

The A/D (Accumulation/Distribution) indicator is a technical analysis tool used to measure the buying and selling pressure on an asset. This indicator works by comparing changes in price movements with changes in trading volume. Two main components are used in calculating the A/D indicator:

Money Flow: This represents the value of buying and selling transactions during a specific time period. Positive money flow indicates that prices have risen during the day, and buyers have been more aggressive. Negative money flow, on the other hand, indicates that prices have fallen, and sellers have been more aggressive.

Accumulation/Distribution Volume: This represents the cumulative total of money flow for each day. Accumulation volume increases on days when prices move upward, while distribution volume increases on days when prices move downward.

The basic formula used to calculate this indicator is as follows:

   A/D = Previous day's A/D + Current day's Money Flow

These calculations are made for each day, and the results are processed cumulatively. The initial A/D value for the first day typically starts from zero or is determined with an initial value, and then each day's new A/D value is updated based on the previous day's A/D value.


Trade with Accumulation/Distribution indicator

The A/D indicator essentially helps us make buy and sell decisions by combining asset price movements and trading volume. An increasing A/D value can be an indication that the asset is accumulating, suggesting that prices might rise. Conversely, a decreasing A/D value may indicate distribution is increasing, potentially signaling a decline in prices. If the A/D value is rising and this increase aligns with a period of upward price trends in the asset, it is known as a long (BUY) signal for opening a position. If the A/D value is falling and this decline aligns with a period of downward price trends in the asset, it is known as a short (SELL) signal for opening a position. For example, take a look at the 4-hour chart for Euro/US Dollar:

The Accumulation/Distribution Indicator is a technical analysis tool that uses volume and price to assess whether a stock is being accumulated or distributed. This indicator can help traders to identify changes in market trends and possible buying or selling opportunities.
Simple Trading with A/D indicator in the EUR/USD charts


The trading strategy mentioned above is only valid if the price movement and the indicator movement are in the same direction. In other words, we follow the trend. Besides, if we observe a negative divergence between the Accumulation/Distribution indicator and the price charts (meaning A/D is decreasing while prices are increasing), this may indicate the possibility of a price decline, and we can consider it as a signal to open a short position. Conversely, if we see a positive divergence between the A/D indicator and the price charts (with A/D increasing while prices are decreasing), this may suggest a possible price increase and can be seen as a signal to open a long position. An example of this can be found in the 4-hour chart of Euro/Swiss Franc below:

The Accumulation/Distribution Indicator and the price chart can diverge, which can be a sign that a trend is about to reverse (negative divergence) or continue (positive divergence).
Divergences between A/D and Price on EUR/CHF


Keep in mind that the A/D indicator should only be used as a part of a trading strategy. It can be misleading and result in losses when used in isolation. Additionally, you should manage each trade using risk management strategies and set stop-loss and take-profit levels. The A/D indicator can help you achieve more accurate results when used in conjunction with other technical analysis tools. It is important to do thorough research and plan your strategy in advance before trading.

Post a Comment