AD (Accumulation/Distribution)
The Accumulation/Distribution (A/D) indicator is a volume-based technical analysis tool that measures the cumulative flow of money into and out of a security. It assesses whether a security is being accumulated (bought) or distributed (sold) by evaluating the relationship between price and volume.
Formula
Money Flow Multiplier = ((Close - Low) - (High - Close)) / (High - Low)
Money Flow Volume = Money Flow Multiplier × Volume
AD = Previous AD + Current Money Flow Volume
How AD Works
The A/D indicator combines price and volume to show how money is flowing into or out of a security. A rising A/D line suggests buying pressure (accumulation), while a falling line indicates selling pressure (distribution). The indicator helps identify potential price trends by showing whether volume is supporting or contradicting the current price movement.
Trading Strategies Using AD
Strategy Examples
- Look for divergences between price and A/D line for potential reversals
- Use A/D line trend direction to confirm price trends
- Monitor A/D line breakouts for early trend signals
- Combine with other indicators for stronger confirmation
- Use in conjunction with support/resistance levels
Support and Resistance Strategy
- Use A/D line support/resistance levels to identify key price levels
- Look for A/D line breakouts to confirm price breakouts
- Multiple tests of A/D support/resistance increase significance
- Monitor volume at support/resistance for confirmation
- Use trendlines on A/D for dynamic support/resistance
Trend Identification
- Rising A/D line confirms uptrend strength
- Falling A/D line confirms downtrend strength
- Flat A/D line suggests consolidation period
- A/D slope helps determine trend momentum
- Compare A/D trends across timeframes for confirmation
Advantages and Limitations
Advantages
- Incorporates both price and volume data
- Helps identify potential trend reversals
- Good for confirming price movements
- Can provide early warning signals
- Useful for spotting divergences
Limitations
- Can produce false signals in choppy markets
- May lag behind price movements
- Requires significant volume data for accuracy
- Should not be used in isolation
- Less effective in low-volume periods
Best Practices When Using A/D
- Combine A/D signals with other technical indicators for confirmation
- Use multiple timeframes to validate trend direction and strength
- Look for divergences between price and A/D line for potential reversals
- Consider market context and overall trend when interpreting signals
- Set appropriate stop-loss levels based on recent price action
- Monitor volume patterns alongside A/D for stronger confirmation
- Pay attention to A/D trendline breaks for early trend change signals
- Use A/D support/resistance levels to identify key price zones
- Be cautious of signals during low volume or holiday periods
- Use A/D as part of a complete trading strategy, not in isolation