Accumulation / Distribution is a momentum indicator and one of the most popular volume indicators. Like all others volume indicators, the Accumulation / Distribution is based on the premise that volume precedes the price. In Forex the volume represents how many ticks or changes of price are registered throughout the session of a traded currency and reflects the money flowing in or out of the market.
What is Accumulation/Distribution indicator?
Accumulation / Distribution tries to estimate the supply and demand by verifying if traders are generally buying (accumulating) or selling (distributing) a certain currency. The cumulative total volume technical analysis indicator developed by Marc Chaikin attracts the attention over weak movements that could transform into price reversal and confirms the price trends. The volume is regarded as being accumulated if the day’s close is higher than previous day’s closing price. The volume is considered distributed if the day’s close is lower than the previous day’s closing price. Therefore in order to calculate Accumulation / Distribution the day’s volume is added to the previous day’s Accumulation / Distribution in an accumulation day and the day’s volume is subtracted if is a distribution day
Calculation of Accumulation/Distribution
Acc/Dist = [(Close — Low) — (High — Close)] / (High —Low) x Period’s volume
The starting point of the Accumulation / Distribution is arbitrary and in technical analysis is used only the shape of the resulting indicators not the actual level of them.
The Accumulation / Distribution is similar to On Balance Volume indicator but is based on the close within the day’s range, rather than the close-to-close up or down used on OBV.
The interpretation of the Accumulation / Distribution indicator is very similar to the On Balance Volume indicator so if the price and the Accumulation / Distribution line both went up for a certain period of time is interpreted as a strong and healthy uptrend. This situation is referred to as convergence between the price and the indicator.
If the price’s trend does not follow the direction of volume represented by Accumulation / Distribution line or is even against it, the price’s trend is not strong and might reverse. This is a divergence situation. A bullish signal appears if the price and the volume are both on uptrend, confirming the strong move or if the price is going down but the Accumulation / Distribution line is going up suggesting increasing interest for the currency.
A bearish signal is created if the price and volume are both going down or if the price is going up while the volume goes down. The last situation indicates that the uptrend of the price will reverse and the price eventually going down. Like all technical analysis indicators, the Accumulation / Distribution must be used in association with other indicators in order to make a thorough investigation of the market.