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.

What is the Accumulation Distribution Indicator (A/D)?

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.

How Do You Calculate the Accumulation Distribution Indicator (A/D)?

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.

What Does The A/D Line Tells Us?

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.

How is the Assessment Made?

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.

What is The Benefit of This Assessment?

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.

• Consider that if the indicator line is having an increasing trend while the stock or security prices are going down, the reverse is possible for the price. It may be due to the buying pressure that the closing is decreasing.
• On the other hand, the trends are swapped, which can be due to the selling pressure and the stocks giving a higher distribution. You will know now that the price will drop, and you should avoid it.

What is an Optimum A/D Indicator Line Strategy?

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.

Advantages and Disadvantages of Accumulation Distribution Indicator Line

Let's discuss the Advantages first.

Advantages of Accumulation Distribution Indicator Line

• You can make a good assessment of the pricing move, such as what volume force is affecting this trend. So, keep using it if you want to understand the general flow of money in the stock market.
• An investor can also use this indicator to understand if the pricing movement is robust and if it will last longer. This allows them to assess the sustainability of their investment and stocks.
• This indicator helps us understand both the buying and selling pressures of the stock price changes. You can make better-informed decisions based on Potential Price Movements.

Drawbacks of Accumulation Distribution Indicator Line

• There are pricing gaps in the calculation as it doesn’t compute the pricing between the last period and the present scenario.
• The indicator line is linked with how the price moves instead of the actual stock price. If that happens, then there can be a disconnect between the factors of the formula.
• Standalone, this indicator won't give the complete picture, and more technical analysis should be complemented.
• You use it to monitor divergences that take a long period to manifest and reverse.

Ending Comments

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.