Volume Indicator: Accumulation Distribution
Accumulation Distribution is a volume based indictor that is used as a price confirming tool or a warning tool that anticipates price change.
The Accumulation Distribution is a variation of the On Balance Volume. The main difference in the Accumulation Distribution is that the volume is weighted relative to the closing price.
You will not find this indicator on many spread betting platforms as they do not report volume, but if you subscribe to any charting software they will contain volume information.
Accumulation Day: the volume is added when the price closes higher than the previous day’s close. The amount of volume added to the indicator is multiplied by the relationship of the closing price relative to the daily range.
Distribution Day: the volume is subtracted when the price closes lower than the previous day’s close. The amount of volume subtracted from the indicator is multiplied by the relationship of the closing price relative to the daily range.
In Summary, when the day is in accumulation the volume is added to the previous day’s Accumulation Distribution line, and vice versa when the day is a distribution day;
Accumulation Distribution: Price confirming tool
When volume increases or decreases with the prices this proves to be an effective price confirming tool. You can read up more on volume in the volume section.
In the Diagram below you can see how the accumulation distribution indicator confirms a rise in prices:
Accumulation Distribution: A warning tool
On the other hand a few weeks later in the same British Land, a spread better with access to volume information could have foreseen a turn around in prices. In fact:
Look at the example above.
In British land we are making new highs, but this is not confirmed by the volume indicator the Accumulation distribution indicator which is instead making lower highs.
This is usually a sign of weakeness.
In conclusion Accumulation Distribution can be used as both a warning tool and a confirming tool.
It is important to add a volume indicator in your price analysis, other volume indicator you can use are the OBV (On Balance Volume), MFI (Money Flow Index), Chaikin Oscillator and the Price volume trend indicator.