The Accumulation/Distribution (A/D) indicator is a volume-based technical analysis tool developed by Marc Chaikin. It measures the cumulative flow of money into and out of a security, helping traders identify whether a stock is being accumulated (bought) or distributed (sold) by institutional investors.
What is the Accumulation/Distribution Indicator?
The A/D indicator creates a cumulative line that rises when buying pressure dominates and falls when selling pressure dominates. Unlike simple volume indicators, A/D considers where the price closes within its daily range, giving more weight to closes near the high (accumulation) or near the low (distribution).
Key concept: The A/D line helps identify divergences between price and volume flow. If price is rising but A/D is falling, it suggests the uptrend may be weak and could reverse.
A/D Indicator Calculation
The calculation involves three steps:
Step 1: Money Flow Multiplier (MFM)
- MFM = [(Close - Low) - (High - Close)] / (High - Low)
This value ranges from -1 to +1:
- +1 when close equals the high (maximum buying pressure)
- -1 when close equals the low (maximum selling pressure)
- 0 when close is at the midpoint
Step 2: Money Flow Volume (MFV)
- MFV = Money Flow Multiplier x Volume
Step 3: A/D Line
- A/D = Previous A/D + Current Period's Money Flow Volume
Calculation Example
Stock XYZ trading day:
High: $52, Low: $48, Close: $51, Volume: 5,000,000
MFM = [($51 - $48) - ($52 - $51)] / ($52 - $48)
MFM = ($3 - $1) / $4 = $2 / $4 = +0.50
MFV = 0.50 x 5,000,000 = 2,500,000
Previous A/D: 10,000,000
New A/D = 10,000,000 + 2,500,000 = 12,500,000
The A/D line rises, indicating accumulation.
Interpreting the A/D Line
Rising A/D Line
- Indicates accumulation (buying pressure)
- Money is flowing into the security
- Closes consistently near the highs
- Bullish signal, especially with rising prices
Falling A/D Line
- Indicates distribution (selling pressure)
- Money is flowing out of the security
- Closes consistently near the lows
- Bearish signal, especially with falling prices
Flat A/D Line
- Balanced buying and selling pressure
- Closes near the middle of the range
- May indicate consolidation or indecision
A/D Divergence Trading
Divergences between price and the A/D line often signal potential reversals.
Bullish Divergence
- Price makes a lower low
- A/D line makes a higher low
- Suggests accumulation despite falling prices
- Potential bullish reversal signal
Bullish Divergence Example
Stock ABC drops from $50 to $45 (lower low).
A/D line remains flat or rises during this decline.
This suggests smart money is buying the dip.
Look for price confirmation before entering long.
Bearish Divergence
- Price makes a higher high
- A/D line makes a lower high
- Suggests distribution despite rising prices
- Potential bearish reversal signal
A/D Trading Strategies
1. Trend Confirmation Strategy
Use A/D to confirm the strength of price trends:
- Uptrend + rising A/D = strong bullish trend
- Downtrend + falling A/D = strong bearish trend
- Conflicting signals suggest weak trend
2. Breakout Confirmation
Validate price breakouts with A/D:
- Price breakout + A/D breakout = high probability move
- Price breakout without A/D confirmation = potential false breakout
- A/D breakout before price can signal upcoming moves
3. Support and Resistance
The A/D line can form its own support and resistance levels:
- A/D breaking above previous highs is bullish
- A/D breaking below previous lows is bearish
- These breaks often precede price moves
4. Divergence Trading
Trade divergences between price and A/D:
- Wait for divergence to form over multiple swings
- Confirm with price action reversal patterns
- Use stop loss beyond the recent extreme
Combining A/D with Other Indicators
A/D + Moving Averages
- Apply a moving average to the A/D line for smoother signals
- A/D crossing above its MA suggests buying pressure increasing
- A/D crossing below its MA suggests selling pressure increasing
A/D + RSI
- RSI oversold + A/D rising = strong buy signal
- RSI overbought + A/D falling = strong sell signal
- Double divergence (both showing divergence) is very powerful
A/D + Price Patterns
- Bullish pattern + A/D confirmation = higher probability
- Pattern breakout + A/D in agreement = strong signal
A/D vs On-Balance Volume (OBV)
Key Differences
- Calculation: A/D uses close location; OBV uses close direction
- Granularity: A/D provides more nuanced readings
- Sensitivity: OBV is more sensitive to daily closes
When to Use Each
- A/D: Better for intraday positioning analysis
- OBV: Better for overall buying/selling trend
- Together: Confirmation when both agree
Limitations of the A/D Indicator
- Gap handling: Does not account for opening gaps
- No absolute levels: Only the direction matters, not the value
- Requires volume: Less useful for low-volume securities
- Lagging: Divergences can take time to play out
Common A/D Mistakes
- Focusing on A/D levels instead of direction and divergences
- Trading divergences without price confirmation
- Using A/D alone without other technical tools
- Ignoring the overall market trend
- Expecting immediate reversals from divergence signals
Best Practices for A/D Analysis
- Look at the A/D trend direction, not absolute values
- Compare A/D to price action for divergences
- Use multiple timeframes for confirmation
- Combine with price patterns and other indicators
- Consider market conditions and sector strength
Analyze Your Volume-Based Trades
Pro Trader Dashboard helps you track and analyze trades based on accumulation and distribution patterns. See which volume signals work best for your strategy.
Summary
The Accumulation/Distribution indicator is a powerful volume-based tool that helps identify whether smart money is buying or selling a security. By analyzing where price closes within its daily range and weighting this by volume, the A/D line provides insight into the strength behind price movements. Use divergences between price and A/D to spot potential reversals, and always confirm signals with other technical analysis tools.
Related reading: Chaikin Money Flow and Volume Analysis in Trading.