What is Accumulation Distribution and the Formula to Compute It?
Accumulation Distribution applies volume to substantiate price movements or inform of weak movements that could result in reversing the prices.
- • Accumulation: Volume is considered to be accumulated when the day's close is higher than the previous day's closing price. This is called "accumulation day"
- • Distribution: Volume is distributed when the day's close is lower than the previous day's closing price. Many traders call this term as "distribution day"
Accumulation Distribution is an indicator for price and volume. It increasingly tracks the volume, and displays the result as a single line with values above and below zero. It use to compare the open and close of the present price bar, with the range of the current price bar, and utilize the result to weight the volume of the current price bar. This type of indicator is displayed on its own chart, separate from the price bars.
Actually, this type of indicator is an alternative of the more commonly used indicator On Balance Volume. Both of these are used to bear out price changes by means of measuring the respective volume of sales.
As a result, when a certain day is an accumulation day, the day's volume is an additional to the previous day's Accumulation Distribution Line. In the same way, when a day is a distribution day, the day's volume is subtracted from the previous day's Accumulation Distribution Line. The main use of this type of indicator Line is to detect divergences between the price movement and volume movement.
- • Increasing and decreasing prices are confirmed by increasing volume.
- • Increasing and decreasing prices are not confirmed and warn of future trouble when volume is decreasing.
- • Description: this indicator is a comparison of the price movement and the current range, with the result being used to weight the current volume.
- • Calculation: AD = ((Close - Open) / (High - Low)) * Volume
A definite part of the daily volume is added to or subtracted from the present accumulated value of the indicator. The closer it is on the closing price to the minimum price of the day is, the greater the subtracted share will be. The closer it is on the closing price to the maximum price of the day is, the more the added share will be. If the closing price is exactly in the middle of the maximum and minimum of the day, the indicator value remains unchanged.
This method is usually used as a divergence indicator, with long entries signaled by bullish divergence, and short entries signaled by bearish divergence. It can also be used as an exit indicator, by showing the end or the weakening of the present movement. When the indicator grows, it means accumulation or buying of a particular security, as the overwhelming share of the sales volume is related to an upward trend of prices. When the indicator drops, it means distribution or selling of the security, as most of sales takes place during the downward price trends.