Calculate and Interpret the Accumulation/Distribution Indicator
Accumulation/Distribution is a technical indicator that tracks momentum by measuring supply and demand to determine whether investors are in general “accumulating” or “distributing” (buying or selling) a particular asset. The accumulation/distribution indicator seeks to identify divergences between the price of the asset and the associated volume and can serve as a leading indicator for price movements.
What is Divergence?
Generally speaking, a divergence occurs when two readings that would be expected to move together are not. For technical analysts, divergence can be positive or negative and each can signal a shift in price direction.
Positive Divergence: The price of an asset sees a new low as the indicator climbs upward.
Negative Divergence: The price of an indicator sees a new low while the indicator moves downward.
To provide an example, high-quality, “blue chip” stocks tend to be the first to appreciate in price after a significant overall market decline. In such cases, the DJIA may advance while the NYSE composite remains flat or continues to decline. Typically, the larger the divergence, the stronger the signal it offers investors.
Calculate the Accumulation/Distribution Indicator
The formula for the accumulation/distribution indicator can be written as:
Accumulation/Distribution= (((Close – Low) – (High – Close)) / (High – Low)) x Volume
When the indicator grows, it signifies buying (accumulation) of a particular asset, as the majority share of the sales volume is related to an upward movement of prices. A dropping indicator signifies selling (distribution) of the asset.
Interpret the Accumulation/Distribution Indicator
If the indicator points to a number of “up days” occurring and accompanied by high trading volume, it can mean the start of increased demand for that asset. If the opposite is true, it would indicate decreased demand for the asset. After confirming divergence, most traders will enlist additional indicators before taking any action on the asset.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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