Discover trends: Accumulation Distribution Indicator

The Accumulation Distribution Indicator tells us if the closing prices are approaching the session's high or low. When the Accumulation Distribution Indicator rises, it indicates that the session's close is approaching the highs, and thus accumulation is taking place. If the Accumulation Distribution Indicator falls, it indicates that the session's close is approaching the lows and thus distribution of the titles is taking place.

accumulation/distribution

Accumulation Distribution Indicator

The Accumulation Distribution Indicator is more reliable when accompanied by trading volume. If prices increase or decrease as volume increases, the Accumulation Distribution Indicator will be more reliable.

When prices are accompanied in the same direction by the Accumulation Distribution Indicator, the indicator is more reliable, and the trend of prices will continue as long as the indicator does not change its trend.

accumulation/distribution indicator

As we can see in the graph, the trend is bullish while the Accumulation Distribution Indicator follows in the same direction as the price, except for an intermediate stretch where both are without trend, to later continue both with the bullish trend. The Accumulation Distribution Indicator confirms that the trend is still bullish, as long as the Accumulation Distribution continues to move upwards.

Interpretation of the Accumulation Distribution Indicator

The Accumulation Distribution Indicator adds part of the volume of that session if the close is higher than the open, and subtracts the volume when the close is lower than the open. The volume is accumulated and the result is the Accumulation Distribution Indicator.

accumulation vs distribution

The volume that is added depends on the difference between the maximum and the minimum of the session and the difference between the opening and the closing of the session. The greater the difference in both cases, the greater the amount of volume that is added or subtracted in case the difference is negative (bearish).

In turn, we can find divergences in the Accumulation Distribution, which would indicate a change of trend in the quotation.

accumulation distribution indicator
Charts showing that the trend is bearish, but how divergence is generated by taking advantage of a rebound in the quotation.

In the example of the Accumulation Distribution indicator exposed, we can see that the trend is bearish, but how divergence is generated by taking advantage of a rebound in the quotation, which leads us to think that the short-term trend (the rebound) can be reversed and that the previous bearish trend continues, as effectively happens.

If the quotation falls while the Accumulation Distribution rises creating an upward divergence, we can think that packages of shares are being bought gradually, which would lead us to think that large investors are buying because they expect a change of trend in the short term.

This indicator is based on the fact that the strong hands of the market do not buy all their desired share in one day, but take advantage of floor situations to buy progressively, and market ceiling situations to sell progressively.

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FAQs

How does the Accumulation Distribution Indicator work?

The Accumulation Distribution Indicator is more reliable when accompanied by trading volume. It adds part of the volume of a session if the close is higher than the open, indicating accumulation, and subtracts the volume if the close is lower than the open, indicating distribution.

What makes the Accumulation Distribution Indicator more reliable?

When prices move in the same direction as the Accumulation Distribution Indicator, the indicator is considered more reliable. The trend of prices will likely continue as long as the indicator maintains its trend.

How should traders interpret the Accumulation Distribution Indicator in relation to price trends

Traders can use the Accumulation Distribution Indicator to confirm the strength of a price trend. As long as the indicator aligns with the price movement, it provides support to the prevailing trend. However, you should be vigilant about potential divergences that could signal a trend change.

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