Accumulation/Distribution Technical Indicator (A/D)

Overview



The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move. In other words, the volume acts as a weighting coefficient at the change of price — the higher the coefficient (the volume) is, the greater the contribution of the price change (for this period of time) will be in the value of the indicator.

Interpretation



The Accumulation/Distribution is really a variation of the more popular On Balance Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices.
When the Accumulation/Distribution moves up, it shows that the security is being accumulated, as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed, as most of the volume is associated with downward price movement.
Divergences between the Accumulation/Distribution and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse.

Examples



Example 1



The following chart shows Battle Mountain Gold and its Accumulation/Distribution.



Battle Mountain's price diverged as it reached new highs in late July while the indicator was falling. Prices then corrected to confirm the indicator's trend.

Example 2



Microsoft is plotted with blue line of Accumulation Distribution. Divergences are shown by yellow trendlines.




  1. Go long [L]. The bullish divergence correctly predicted the subsequent rally.
  2. Go short [S]. The bearish divergence signaled the correction in January.
  3. Go short [S]. The bearish divergence signaled the correction in April.
Calculation



A portion of each day's volume is added or subtracted from a cumulative total. The nearer the closing price is to the high for the day, the more volume added to the cumulative total. The nearer the closing price is to the low for the day, the more volume subtracted from the cumulative total. If the close is exactly between the high and low prices, nothing is added to the cumulative total.

The Accumulation Distribution Index is calculated as follows:
  1. Closing Price is compared to Opening Price:
              Close - Open
  2. And compared to the day's range:
              (Close - Open) / (High - Low)
  3. The result is multiplied by Volume for the day:
              (Close - Open) / (High - Low) * Volume
  4. The Accumulation Distribution Index is calculated as a cumulative total of each day's reading.

Some charting software use a simpler formula where the Open price is not available:

                    {(Close - Low) - (High - Close)} / (High - Low) * Volume

The Close is compared to the day's range rather than to the Opening Price.

Sources and Additional Information:

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