It is an indicator that studies the volume of trade.
How does Accumulation/Distribution work?
The first guide of the Accumulation/Distribution (A/D) indicator is that stock volume precedes stock price. The quantity of shares traded is relative to the increase and fall of stock prices. The A/D indicator predicts the direction of the quantity flow. It determines future stock price movements and hence provides a foothold.
If the stock price and A/D indicator make top peaks and high troughs, the upward trend will probably go on, whereas if both make low peaks and low troughs, the downward trend will likely continue.
Likewise, if the A/D indicator is rising for a given period, the accumulation (buying pressure) could also be higher and may be a sign of the longer-term upward breakout. The same is true if the A/D indicator is falling for a given period; this might be a sign that distribution (selling pressure) could also be higher and may be a sign of the longer-term downward breakout.
Example of Accumulation/Distribution
Let's use Stock XYZ as a case study. In January, the rising stock market saw over a million shares on the stock XYZ; investors had little interest in this new company and only bought about 200,000 units at $8 per share. Six months later, in July, the company XYZ saw a major boost that caught investors' attention.
In less than a week, the available 800,000 units were down to less than 2,000 units at $15 per share. In the subsequent weeks, trading for the stock went to its peak, with investors willing to pay anything to acquire the stock. The more investors accumulate a stock or the less stock available for distribution, the higher the price will be,
Types of Accumulation/Distribution
Types of accumulation/distribution are trend confirmation and divergences. Trend confirmation is a pretty straightforward concept. It is an uptrend within the accumulation distribution line that reinforces an uptrend on the worth chart and the other way around. Divergences are of two forms: bullish and bearish divergence.
When the price moves to new lows but the accumulation distribution line doesn't confirm these lows and moves higher, a bullish divergence forms. A bearish divergence forms when the price moves to new highs, but the accumulation distribution line doesn't confirm and moves lower.
Therefore, the more bullish or bearish the session has been, the greater percentage of the entire volume is added (or subtracted) from the accumulated amount. The foremost important thing about the A/D indicator is to look at its divergences.
On-Balance Volume vs. Accumulation/Distribution
Both On-Balance Volume (OBV) and Accumulation/Distribution indicators are volume-based indicators but with different approaches.
Financial writer Joe Granville developed OBV to assess the cumulative volume flow of stock. On-balance volume adds a period's total volume if the stock closes at a better price than the last close and subtracts if it ends at a lower cost. The entire positive/negative volume flow forms the OBV line, which employs a comparison indicator of confirmation or divergence for the stock price.
The accumulation/distribution indicator doesn't think about the previous close. Instead, it focuses on the proximity of price relative to stock's high-low range for the given period (day, week, or month). It identifies the discrepancies between prices and volume and offers a warning about future price movements.
Significance of Accumulation/Distribution
Accumulation/Distribution is a handy technical indicator to assess the cumulative flow of capital for a financial asset like currency pair; for instance, it supports both price and volume and examines the trend of an asset's price within the market. The A/D indicator can determine the buying and selling pressure of stock within the market and, supporting that, offers insights about potential stock price changes. Hence, one can calculate the trading position as per actual price movements.
The A/D line also spots price volume divergences, which helps traders confirm the trend's strength and sustainability. It doesn't state changes in price between periods; hence, a series of price gaps may go undetected.
In conclusion, you may not want to use only the Accumulation/Distribution Line indicator for creating decisions associated with opening and shutting new positions within the market.
History of Accumulation/Distribution
Famous trader and analyst Marc Chaikin developed Accumulation/Distribution to settle on the stocks traded foremost. Later, the indicator became more widely used as a fundamental indicator for other markets, including Forex.