Accumulation/Distribution

Accumulation/Distribution is a momentum indicator that associates changes in price with the daily range.

Study Type: Stand-alone

Description

Divergences between the Accumulation/Distribution and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse and start going up.

If the day's price change is positive then the difference in the daily high and low price is added to the total, and conversely if the daily change is negative then the daily range is subtracted from the total.

Formula

The AD index is computed several different ways. Some computations normalize the index, while others added extra smoothing factors through the use of moving averages. The indicator uses the following computations to create and chart the AD index. They may differ from other procedures published by the original author. As a starting point, the indicator sets the initial value of the AD index to zero. From there, it performs the following comparisons. The comparisons are logically and mutually exclusive. Only one of the three can be valid to correctly measure the market's accumulation or distribution.

The first comparison checks for accumulation, i.e., is current close higher than previous close? If the market is accumulating, then compute the difference between current close and low. Next, add that arithmetic difference to the Accumulation/Distribution Index. Traders perceive an undervalued market and buy. The procedure is:

If Closet > Closet-1 then ADt = ADt-1 + (Closet - Lowt)

The second comparison checks for no change in price. If correct, the AD index does not change. It states:

If Closet = Closet-1 then ADt = ADt-1

The last and final comparison checks for a down market. It checks for current close below previous close. If that is correct, the market is distributing. The software first computes the difference between current high and close. It then subtracts that difference from the AD index. This measures market distribution. Traders perceive an overvalued market and are selling. The final computation is:

If Closet < Closet-1 then ADt = ADt-1 - (Hight - Closet)

• ADt is the accumulation/distribution index for the current period.
• ADt-1 is the accumulation/distribution index for the previous period.
• Closet is the closing price for the current interval.
• Closet-1 is the closing price for the previous interval.
• Hight is the true high price for the current interval.
• Lowt is the true low price for the current interval.

Note: The true high is the higher value of the current high or the previous close. The true low is the lower value of the current low or the previous close.

Parameters

None