Dec 24, 2023 By Triston Martin
In this article, we are going to discuss how to easily understand different increasing and decreasing stock trends using the accumulation distribution indicator. We will further discuss how to calculate it, plus some advantages and disadvantages of using this Accum Dist indicator.
The accum dist indicator is a calculation method and indicator that helps you assess the trends of stocks in the market. It also helps vary when the stock market is going in an upward trend, yet the accumulation distribution line is on a downward trend. This scenario most likely means a downward trend in the future.
The concept uses the number of stocks going in and out compared with the present stock prices according to a previous period.
Following is the method of calculation for this indicator.
In the first step, you need to calculate the multiplier using the following formula.
MFM = (Close – Low) – (High – Close) / High – Low
Here, the MFM is the Money Flow Multiplier, which will later go into the formula to calculate the Money Flow Volume. MFM is a vital multiplier as it helps to calculate the previous as well as current volume flow. Close is the closing price, while High and Low are the high and low prices for the specific period.
The following formula is Money Flow Volume.
MFV = MFM x Period Volume
Finally, we can now calculate the A/D ratio and get our accumulation distribution line.
A/D = Previous A/D + CMFV, where the CMFV is the current period's money flow volume.
Keep in mind that you need to calculate the initial formulae for each period and get the correct answers.
This line shows us the trends of supply and demand of different stocks and how the price influences the trend. There are different scenarios where the line goes along the price or in opposite directions.
When you calculate the multiplier for a particular period, the results can predict how strong the buying and selling were during this period. The main factor you need to consider here is whether the closing price was near the range or not.
The closeness of these factors does not matter; you need to multiply this factor by volume to get an idea of the A/D jumps.
So, if the stock price closes near the higher ranges, the jump in A/D will be high as the volume is high as well. In the counter scenario, there are two similar cases. For the 1^{st}, the volume is low, but the price closes near the higher range. In the 2^{nd}, the volume itself is high, yet the price closed near the average price range. For both these scenarios, the A/D jump won't be that high.
You can apply the same cause and effect if these factors were playing near the lower end of the range in the graph.
There are a few scenarios where this assessment can be helpful. In general, this accumulation distribution indicator will allow you to know the most recent reversal in the stock market, both upcoming and beforehand.
You can use this Accumulation distribution indicator Line to predict whether a stock will stay its course and whether there will be any sort of reversal. Here, you don’t want inevitable volatility in the market.
You may understand more about this in the above section, where different trends are discussed.
Let's discuss the Advantages first.
The stock market is a complex place of closing prices and upward/downward going trends. People spend their lives understanding the nuances of the marketplace.
There are many things you can get a grip on if you understand concepts like the accumulation distribution indicator. Most of these concepts are discussed in the article. We explained how to avoid investing in a stock if it has a different trend than the A/D line. Also, how can you tell the sustainability of a stock just by comparing MFV and MFM values of different periods?
In the end, it is always wise to consult with experts on your findings and get the best recommendations.
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