The Accumulation Distribution Indicator is a popular technical indicator that can help traders identify price trends.
In this article, we will be exploring how to use it to catch trends in prices and find profitable trades.
Let’s get into it!
What Is The Accumulation Distribution Indicator?
To visualise the buying and selling pressure on an asset, Marc Chaikin created what’s known as an accumulation distribution line.
This is useful for traders to determine whether there are more buyers or sellers in the market which can help confirm trends.
The Accumulation Distribution is a volume-based indicator that was designed to show the market’s supply and demand.
It tries to determine whether traders are buying or selling by plotting Money Flow Volume as it accumulates throughout time.
The AD Indicator can reveal divergences between price and flow, which helps you identify when trends will reverse in order to get into trades early on either end of the trend!
To calculate the Accumulation/Distribution indicator, you need to get three things:
- The Close Location Value (CLV)
- The Money Flow Volume (MFV)
- The value over multiple periods.
To work out the Accumulation Distribution formula is quite complex to compute each time.
Luckily, most trading platforms already have the indicator preconfigured.
However, this is good knowledge for your own understanding of what builds this indicator.
Step 1: To calculate the CLV we do the following:
[(close – low) – (high – close)] (high- low) = CLV
Step 2: We then use the CLV value and times it by the asset’s traded volume – this gives us the Money Flow.
CLV x Asset Volume = Money Flow Volume (MFV)
Step 3: Finally we add this new MFV Value to the previous Accumulation Distribution value.
So: Current AD Value = Previous AD Value + MFV
Good job you don’t have to learn it off by heart, but at least you now know how the AD indicator is built so you can truly understand what it tries to highlight for you.
How To Use The Accumulation Distribution Forex Indicator?
The indicator tells us whether buying or selling pressure is more prevalent in the market. If it is rising, we know that accumulation will occur and buyers are pushing up the price.
If we see the A/D line falling, this suggests selling pressure has taken charge.
If there is a strong correlation between the indicator and price, then this tells us that we can trust our current trend.
However, there are times when the indicator and the price do not follow one another.
This creates what is called a Divergence.
Divergence trading can be an incredibly powerful indicator of an upcoming reversal.
A falling price and rising indicator may signal a rise in the future which is a bullish signal.
However, if the price rises while the A/D indicator is falling it suggests that prices could be about to dip.
This means a bearish reversal may soon take place which must not be ignored.
Let’s look at the above examples on a chart:
A Bullish Signal
When we use this indicator we want to look for the forex market structure to create new lower lows and the indicator echoing the same thing.
In this example, you can see that the market created a lower low, alongside the AD Indicator. This gave it a signal that the market could reverse in the near future.
As you can see, the market went on a bullish run ever since.
A Bearish Signal
When we use this indicator for a bearish signal we want to look for the market structure to create new higher highs and the indicator printing the same output.
In this example, you can see that the market created a higher high, with the Indicator creating the same. This gave it a signal that the market may become bearish in the near future.
What followed after was a sharp drop over a few trading days.
A Bullish Divergence Signal
For a bullish divergence signal, we want to look for the market structure to create new lower lows and the indicator creating higher lows.
In this example, you can see that the market created a lower low, with the Indicator creating the higher lows. This gave it a divergence signal that the market may become bullish in the near future.
As you can see, due to the power of divergences, the price shot up almost immediately after the divergence was discovered.
A Bearish Divergence Signal
For a bearish divergence signal with this indicator, we want to look for the market structure to create new higher highs and the indicator creating lower highs.
In this example, you can see that the market created a higher high, with the Indicator creating the lower highs. This gave it a divergence signal that the market may become bearish in the near future.
The Advantages Of Using The Accumulation Distribution Technical Indicator
Now you know the basics of the indicator, here are some of the main advantages of using this indicator for day trading forex.
The indicator can identify strong moves.
Many traders look for buying opportunities on dips and selling opportunities on rallies. This indicator allows you to do this by showing if the market is accumulating or distributing.
The indicator helps us identify a trend reversal.
By using divergence trading we can spot an upcoming change in price direction before any other indicators pick it up. This is extremely useful when day trading currencies as it means you get early entry into your trades!
Using signals from different timeframes can increase our chances of success and reduce risk.
The Accumulation Distribution indicator displays the combined signals from all timeframes. This means you can look for divergences across multiple timeframes and identify high-probability trades.
It’s an early signal of interest in a currency pair.
The A/D line tells us whether there is more demand for or supply of the asset between two currencies. If we see it begin to rise, this suggests that traders are becoming interested in buying the currency which could lead to increased demand and a rise in price over time.
This indicator works very well with supply and demand trading areas. You can use your Supply and Demand Zones as areas and then reference how the AD line is performing near one of these areas.
This gives you another layer to improve your success.
However, it’s not a guaranteed way to trade as no indicator will be 100% accurate all of the time.
The Disadvantages Of Using The Accumulation Distribution Trading Indicator
With every trading indicator, there are limitations and disadvantages.
It might not be a reliable all-around trading strategy.
As mentioned before, the Accumulation Distribution Line is a confirmation tool and cannot be used to take trades alone.
It needs to be used alongside other trading indicators or price action to give you an edge over other traders.
Sometimes divergences do not create an opportunity like expected.
You may see that the line creates a divergence but the price does not go up or down as your analysis told you it would.
This could mean that no opportunity exists but sometimes it can mean it’s a false signal so always look at other indicators for further confirmation of your trade setups.
The A/D indicator is a good market-timing tool but has some limitations. For example, it does not factor in price changes from one period to the next and focuses only on where the price closes within its current range.
Key Points About What You Should Know Before Starting With This Indicator…
– The Accumulation Distribution gives us a good idea of possible price movements
– Divergences in the indicator will give us an early entry into trades which offers higher chances of success and less risk
– You should combine this indicator with other forex tools such as supply & demand, basic technical analysis, and chart patterns to improve your trading accuracy.
– Accumulation Distribution should not be used as a standalone indicator but as part of your overall trading plan.
Where to Download the Accumulation Distribution Indicator?
The Accumulation Distribution Indicator is free to use and can be found on the MetaTrader 4 platform.
You’ll need to download the indicator directly onto your MT4 trading platform.
You can also find the indicator on TradingView for free too.
Accumulation Distribution Indicator Conclusion
The Accumulation Distribution indicator is a great tool for traders to use in their trading strategies. The AD line can be used as an early signal of interest or divergence and it works well with other indicators such as supply & demand, technical analysis, chart patterns, and price action.
This will increase your chances of success when forex trading pairs because you’ve got more tools at your disposal for making accurate predictions about the market. Remember that this isn’t 100% accurate all of the time so make sure you combine it with other indicators too!
Go ahead, give the indicator a try and see if it’s something you’d implement in your own trading strategy.