The Accumulation Distribution Line (A/D Line) is a cumulative volume-based indicator that measures the underlying supply and demand of a security. Developed by Marc Chaikin, the A/D Line helps traders identify whether a stock is being accumulated by buyers or distributed by sellers, often revealing trend strength or potential reversals before they appear in price.
What is the Accumulation Distribution Line?
The A/D Line is a running total that adds or subtracts a portion of each day's volume based on where the close falls within the day's trading range. Unlike simple volume indicators, the A/D Line considers whether volume is associated with price strength (closing near highs) or weakness (closing near lows).
Key concept: If a stock closes near its high on heavy volume, the A/D Line rises sharply, indicating accumulation. If it closes near its low on heavy volume, the A/D Line falls, indicating distribution.
A/D Line Calculation
The Accumulation Distribution Line is calculated using three components:
Step 1: Close Location Value (CLV)
This determines where the close is relative to the day's range:
- CLV = [(Close - Low) - (High - Close)] / (High - Low)
The CLV ranges from -1 to +1:
- +1 when close equals the high (maximum accumulation)
- -1 when close equals the low (maximum distribution)
- 0 when close is at the midpoint
Step 2: A/D Value for Each Period
- A/D Value = CLV x Volume
Step 3: Cumulative A/D Line
- A/D Line = Previous A/D Line + Current A/D Value
Calculation Example
Stock XYZ trading day:
High: $55, Low: $50, Close: $54, Volume: 5,000,000
CLV = [($54 - $50) - ($55 - $54)] / ($55 - $50)
= ($4 - $1) / $5 = $3 / $5 = +0.60
A/D Value = 0.60 x 5,000,000 = +3,000,000
This positive value adds to the running A/D Line total, showing accumulation.
Interpreting the A/D Line
Rising A/D Line
- Indicates accumulation (buying pressure dominates)
- Smart money may be buying
- Supports bullish price action
Falling A/D Line
- Indicates distribution (selling pressure dominates)
- Smart money may be selling
- Supports bearish price action
Flat A/D Line
- Supply and demand are balanced
- No clear accumulation or distribution
- Often occurs during consolidation periods
A/D Line Trading Strategies
1. Trend Confirmation
Use the A/D Line to confirm price trends:
- Rising price + rising A/D Line = healthy uptrend
- Falling price + falling A/D Line = healthy downtrend
- Agreement between price and A/D Line confirms trend strength
Trend Confirmation Example
Stock ABC is in an uptrend, making higher highs and higher lows.
The A/D Line is also trending upward, making new highs with price.
This confirms the uptrend is supported by accumulation.
Continue holding long positions or look for pullback entries.
2. Divergence Trading
Divergences between price and the A/D Line often precede reversals:
Bullish Divergence
- Price makes a lower low
- A/D Line makes a higher low
- Indicates accumulation despite falling prices
- Potential bullish reversal signal
Bearish Divergence
- Price makes a higher high
- A/D Line makes a lower high
- Indicates distribution despite rising prices
- Potential bearish reversal signal
3. Breakout Validation
Confirm price breakouts with the A/D Line:
- Bullish breakout + rising A/D Line = valid breakout
- Bullish breakout + falling A/D Line = suspect breakout (may fail)
- A/D Line breaking out before price can be an early warning signal
4. Identifying Smart Money Activity
The A/D Line can reveal institutional activity:
- Rising A/D Line during sideways price action = stealth accumulation
- Falling A/D Line during sideways price action = stealth distribution
- These patterns often precede significant price moves
A/D Line vs Other Volume Indicators
A/D Line vs On-Balance Volume (OBV)
- OBV: Adds or subtracts entire day's volume based on close vs previous close
- A/D Line: Adds or subtracts a portion of volume based on where close is within the range
- A/D Line is generally considered more accurate because it accounts for intraday price action
A/D Line vs Chaikin Money Flow
- A/D Line: Cumulative, unbounded indicator
- CMF: Bounded oscillator based on A/D Line concept over a specific period
- Both provide similar insights but in different formats
Combining A/D Line with Other Tools
A/D Line + Moving Averages
- Apply a moving average to the A/D Line for smoother signals
- A/D Line crossing above its MA = bullish
- A/D Line crossing below its MA = bearish
A/D Line + Price Patterns
- Head and shoulders pattern + negative A/D divergence = stronger reversal signal
- Double bottom + positive A/D divergence = stronger reversal signal
Limitations of the A/D Line
- Does not account for gaps between trading sessions
- Can give false signals in low-volume stocks
- The absolute value is meaningless - only the direction and changes matter
- Works best in conjunction with other analysis tools
Track Volume-Based Signals
Pro Trader Dashboard helps you analyze volume patterns and accumulation/distribution in your trading.
Summary
The Accumulation Distribution Line is a powerful tool for understanding the underlying supply and demand dynamics of a security. By measuring volume flow based on where prices close within their daily range, the A/D Line reveals whether accumulation or distribution is occurring. Use it to confirm trends, spot divergences that precede reversals, and validate breakouts. Remember that the A/D Line works best when combined with price action analysis and other technical indicators.
Learn more: Chaikin Money Flow and volume analysis.