Accumulation Distribution looks at the proximity of closing prices to their highs or lows to determine if accumulation or distribution is occurring in the market. The proximity value is multiplied by volume to give more weight to moves with higher volume.
How this indicator works
The actual value of the Accumulation Distribution is unimportant. Concentrate on its direction.
- When both price and Accumulation Distribution are making higher peaks and higher troughs, the up trend is likely to continue.
- When both price and Accumulation Distribution are making lower peaks and lower troughs, the down trend is likely to continue.
- If during a trading range, the Accumulation Distribution is rising, then accumulation may be taking place and is a warning of an upward break out.
- If during a trading range, the Accumulation Distribution is falling, then distribution may be taking place and is a warning of a downward break out.
- The Accumulation Distribution Line only looks at the level of the close relative to the high-low range for a given period (day, week, month). The AD line ignores the change from one period to the next. With this formula, a security could gap down and close significantly lower, but the Accumulation Distribution Line would rise if the close were above the midpoint of the high-low range.
- When price continues to make higher peaks and Accumulation Distribution fails to make higher peak, the up trend is likely to stall or fail. This is known as a negative divergence.
- When price continues to make lower troughs and Accumulation Distribution fails to make lower troughs, the down trend is likely to stall or fail. This is known as a positive divergence.