What Is the Accumulation/Distribution Indicator (A/D)?

What Is the Accumulation/Distribution Indicator (A/D)?

Let me explain the accumulation/distribution indicator, or A/D as it's commonly known. This is a cumulative tool that relies on both volume and price to determine if a stock is being accumulated or distributed. What you're looking for here are divergences between the stock's price and its volume flow, which can give you a clear sense of a trend's strength. For instance, if the price is climbing but the A/D is dropping, it might mean there's not enough buying volume to keep that rise going, and a price drop could be on the horizon.

Key Takeaways on the A/D Indicator

You need to understand that the A/D line evaluates supply and demand by examining where the price closed in the period's range and multiplying that by volume. Remember, it's cumulative, so each period's value gets added to or subtracted from the previous one. Generally, if the A/D line is rising, it confirms an upward price trend, and if it's falling, it supports a downward trend.

The Accumulation/Distribution Indicator (A/D) Formula

Let's get into the formula. First, calculate the money flow multiplier, or MFM, using this: MFM = [(Close - Low) - (High - Close)] / (High - Low), where Close is the closing price, Low is the period's low, and High is the period's high.

Next, figure out the money flow volume by multiplying MFM by the period's volume: Money Flow Volume = MFM × Period Volume.

Finally, the A/D itself is the previous A/D plus the current money flow volume: A/D = Previous A/D + CMFV, with CMFV being the current period's money flow volume.

How to Calculate the A/D Line

To calculate the A/D line, start with the multiplier using the latest period's close, high, and low. Then, multiply that by the current volume to get the money flow volume. Add this to the previous A/D value—if it's your first time, just use that money flow volume as the starting point. Keep repeating this at the end of each period, adding or subtracting the new money flow volume to the running total. That's your A/D.

What Does the Accumulation/Distribution Indicator (A/D) Tell You?

The A/D line reveals how supply and demand are affecting price—it can move with price changes or against them. The multiplier measures buying or selling strength by checking if the close was in the upper or lower part of the range, then factors in volume. So, a close near the high with high volume pushes the A/D up significantly, but low volume or a mid-range close won't move it as much.

The same logic applies for closes in the lower range, determining how much the A/D drops. You can use the A/D to evaluate trends and spot reversals. If the price is downtrending but A/D is uptrending, it suggests buying pressure and a possible upside reversal. Conversely, an uptrending price with a downtrending A/D indicates selling pressure and a potential decline.

The slope of the A/D line matters too—a steep rise confirms a strong uptrend, and a steep fall with dropping prices means distribution is ongoing and declines will likely continue.

The Accumulation/Distribution Indicator (A/D) vs. On-Balance Volume (OBV)

Both A/D and on-balance volume (OBV) use price and volume, but they differ in approach. OBV simply adds the period's volume if the close is higher than the previous one or subtracts if lower. A/D, however, ignores the prior close and uses a multiplier based on the close's position in the current range, so they can give you different signals.

Limitations of Using the Accumulation/Distribution Indicator (A/D)

Be aware of the A/D's limitations—it doesn't account for price changes between periods, focusing only on the close within the current range, which can lead to odd results. For example, if a stock gaps down 20% on high volume but closes in the upper part of its daily range, the A/D might rise sharply despite the big loss, so watch the price chart for such anomalies.

Divergences, a key use of A/D, can persist for a long time and aren't reliable for timing—they don't guarantee an imminent reversal, and prices might not reverse at all. A/D is just one way to gauge trend strength or weakness, but it's imperfect. Combine it with price action, chart patterns, or fundamental analysis for a fuller view of what's driving a stock's price.