Hello. The key to successful trading in financial markets
lies in acquiring a good education and practicing extensively. Fortunately,
today we have easier access to all of these. We can obtain financial knowledge
using the internet. Mathematical technical analysis is known as the basis for
Forex trading. In technical analysis, technical indicators are mostly
preferred. This article is about one of these technical indicators, the Accumulation/Distribution
(A/D) indicator.
What is the Accumulation/Distribution indicator?
The Accumulation/Distribution (A/D) indicator was developed
by American technical analyst J. Welles Wilder Jr. to measure buying and
selling pressure on an asset. Wilder introduced the A/D indicator in his 1978
book, "New Concepts in Technical Trading Systems." This indicator
assists in making trading decisions by analyzing the price movements and
trading volume of an asset. The Accumulation/Distribution indicator is used to
monitor the accumulation and distribution of an asset. It works by comparing
changes in price movements with changes in trading volume. When the price is
rising and the trading volume is increasing, it indicates an increase in buying
pressure. Conversely, when the price is falling and the trading volume is
increasing, it indicates an increase in selling pressure.
How is the Accumulation/Distribution indicator
calculated?
The A/D (Accumulation/Distribution) indicator is a technical
analysis tool used to measure the buying and selling pressure on an asset. This
indicator works by comparing changes in price movements with changes in trading
volume. Two main components are used in calculating the A/D indicator:
Money Flow: This represents the value of buying and selling
transactions during a specific time period. Positive money flow indicates that
prices have risen during the day, and buyers have been more aggressive.
Negative money flow, on the other hand, indicates that prices have fallen, and
sellers have been more aggressive.
Accumulation/Distribution Volume: This represents the
cumulative total of money flow for each day. Accumulation volume increases on
days when prices move upward, while distribution volume increases on days when
prices move downward.
The basic formula used to calculate this indicator is as
follows:
A/D = Previous day's A/D + Current day's Money Flow
These calculations are made for each day, and the results
are processed cumulatively. The initial A/D value for the first day typically
starts from zero or is determined with an initial value, and then each day's
new A/D value is updated based on the previous day's A/D value.
Trade with Accumulation/Distribution indicator
The A/D indicator essentially helps us make buy and sell
decisions by combining asset price movements and trading volume. An increasing
A/D value can be an indication that the asset is accumulating, suggesting that
prices might rise. Conversely, a decreasing A/D value may indicate distribution
is increasing, potentially signaling a decline in prices. If the A/D value is rising
and this increase aligns with a period of upward price trends in the asset, it
is known as a long (BUY) signal for opening a position. If the A/D value
is falling and this decline aligns with a period of downward price trends in
the asset, it is known as a short (SELL) signal for opening a position.
For example, take a look at the 4-hour chart for Euro/US Dollar:
 |
| Simple Trading with A/D indicator in the EUR/USD charts |
The trading strategy mentioned above is only valid if the
price movement and the indicator movement are in the same direction. In other
words, we follow the trend. Besides, if we observe a negative divergence
between the Accumulation/Distribution indicator and the price charts (meaning
A/D is decreasing while prices are increasing), this may indicate the
possibility of a price decline, and we can consider it as a signal to open a short
position. Conversely, if we see a positive divergence between the A/D indicator
and the price charts (with A/D increasing while prices are decreasing), this
may suggest a possible price increase and can be seen as a signal to open a long
position. An example of this can be found in the 4-hour chart of Euro/Swiss
Franc below:
 |
| Divergences between A/D and Price on EUR/CHF |
Keep in mind that the A/D indicator should only be used as a part of a trading strategy. It can be misleading and result in losses when used in isolation. Additionally, you should manage each trade using risk management strategies and set stop-loss and take-profit levels. The A/D indicator can help you achieve more accurate results when used in conjunction with other technical analysis tools. It is important to do thorough research and plan your strategy in advance before trading.