ADOSC (Accumulation/Distribution Oscillator)
The Accumulation/Distribution Oscillator (ADOSC) is a momentum indicator that measures the difference between two EMAs of the Accumulation/Distribution Line. It helps identify changes in the accumulation/distribution flow of a security by comparing short-term and long-term momentum.
Formula
Money Flow Multiplier = ((Close - Low) - (High - Close)) / (High - Low)
Money Flow Volume = Money Flow Multiplier × Volume
AD = Previous AD + Current Money Flow Volume
ADOSC = EMA(AD, Fast Length) - EMA(AD, Slow Length)
How ADOSC Works
The ADOSC combines price, volume, and momentum to show the flow of money into or out of a security. When the oscillator is positive, it indicates accumulation (buying pressure), and when negative, it shows distribution (selling pressure). The indicator helps traders identify potential trend reversals and confirm existing trends by showing whether volume supports the price movement.
Trading Strategies Using ADOSC
Strategy Examples
- Enter long positions when ADOSC crosses above zero with increasing volume
- Enter short positions when ADOSC crosses below zero with increasing volume
- Look for divergences between price and ADOSC for potential reversals
- Use ADOSC crossovers of its signal line for entry/exit signals
- Combine with trend indicators for stronger confirmation
Support and Resistance Strategy
- Use ADOSC zero line as dynamic support/resistance level
- Look for multiple tests of zero line for stronger levels
- Monitor volume at key ADOSC levels for confirmation
- Use extreme ADOSC readings to identify potential reversal zones
- Combine with price-based support/resistance for better accuracy
Trend Identification
- Consistently positive ADOSC indicates uptrend
- Consistently negative ADOSC indicates downtrend
- ADOSC oscillating around zero suggests sideways trend
- Higher highs in ADOSC confirm bullish momentum
- Lower lows in ADOSC confirm bearish momentum
Advantages and Limitations
Advantages
- Combines volume and price data for better analysis
- Helps identify potential trend reversals early
- Effective for confirming price movements
- Useful for spotting bullish/bearish divergences
- Provides clear overbought/oversold signals
Limitations
- Can generate false signals in choppy markets
- May lag behind price action due to moving averages
- Requires confirmation from other indicators
- Less effective in low volume periods
- Can be affected by extreme volume spikes
Best Practices When Using ADOSC
- Combine ADOSC signals with other technical indicators for confirmation
- Use multiple timeframes to validate trend direction and strength
- Wait for clear zero-line crossovers rather than acting on small fluctuations
- Consider market context and overall trend when interpreting signals
- Set appropriate stop-loss levels based on recent price action
- Monitor volume patterns alongside ADOSC for stronger confirmation
- Look for divergences between price and ADOSC for potential reversals
- Pay attention to extreme ADOSC readings for overbought/oversold conditions
- Be cautious of false signals during low volume or choppy markets
- Use ADOSC as part of a complete trading strategy, not in isolation