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How does the accumulation/distribution indicator work?

How does the accumulation/distribution indicator work?
Asked by
Brian Hayslip categorie-icon, time-icon7 months ago
1 Answer Answer Question

Sheila Olson
Answered time-icon7 months ago

Technical traders use accumulation/distribution as a momentum indicator based on the amount of money flowing in and out of a security. It was developed by Marc Chaikin, who used it to develop the “cumulative money flow line,” or accumulation/distribution line (ADL).

As a cumulative indicator, chartists can use the accumulation/distribution line as a running total of the money flow volume in a given period, which can then be used to confirm an underlying trend or predict reversals when there is a price divergence.

To calculate accumulation/distribution, you must first calculate the money flow multiplier and multiply that figure by volume over the given period.

Using the summary above for AbbVie Inc (ABBV), which closed at $80.54, the accumulation/distribution calculation for this trading day would look like this:

Money flow multiplier = (close – low) – (high – close)/(high – low)

ABBV:             (80.54 – 79.43) – (82.61 – 80.54) / (82.61 – 79.43) =

1.11 – 2.07 / 3.18 =

0.96/3.18 =

-0.30

The money flow multiplier is then multiplied by volume for the period, in this case, a single trading day.

Accumulation/distribution = -0.30 x 6,706,954 or  -2,012,086

Interpreting accumulation/distribution

The money flow multiplier ranges between -1.0 and +1.0 and is the key to ADL. It will be in negative territory when the close is nearer the bottom of the day’s range and positive when it closes near the top.

A high multiplier with high volume indicates strong buying pressure, a negative high multiplier with high volume indicates strong selling pressure. Money flow volume can either confirm or contradict a price trend

When both price and accumulation/distribution have higher peaks and troughs, the uptrend is likely sustainable. When peaks and troughs are lower, the downtrend is likely to continue.

If the accumulation/distribution is climbing during a trading period, accumulation may be occurring and an upward breakout may be imminent. If the accumulation/distribution falls, distribution may be underway, which suggests a downward breakout.

When price is peaking higher than accumulation/distribution, known as negative divergence, the uptrend will likely stall.

When price dips lower than accumulation/distribution, known as positive divergence, the downtrend will likely fail.

An uptrend in price with a downtrend in accumulation/distribution indicates a possible bearish reversal, while a downtrend in price with an upward trending accumulation/distribution indicates a bullish reversal.

The ADL is useful for tracking the general flow of money and can confirm the strength and longevity of a move. However, there are some drawbacks to the ADL, primarily in that it doesn’t account for trading gaps, since accumulation/distribution is based on closing price.

Although the ADL is a valuable tool on its own, it works best paired with another indicator, preferably the RSI, which compares the magnitude of gains and losses. The money flow index, which is a 14-day momentum indicator, can also be combined with both the ADL and the RSI to help spotlight overbought and oversold positions.

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