What is it?
Accumulation/Distribution (A/D) was developed by Larry Williams in 1972 as a leading market strength indicator for trading stocks but it can also be applied to futures and other securities. Accumulation/Distribution (A/D) is an enhancement over On Balance Volume (OBV) as it considers price and volume. However, it takes the relationship between the opening and the close, and the price range into account rather than just the close. For A/D volume is considered bullish when the price close is higher than the open and bearish when the price close is lower than the open. However, the amount of volume assigned to the indicator is dependent on the distance between the open and the close, and distance between the high and the low, or the price range.
How is it calculated?
Accumulation/Distribution (A/D) is calculated in two steps. First, the difference between the close and the open is calculated and divided by the difference between the high and the low of the price range. The result is then multiplied by the volume. The formula is:
A/D = ( Close – Open ) / ( ( High - Low ) x Volume )
How is it used?
As with the OBV, the direction of the A/D line indicates buying or selling strength with a rising A/D indicating increased demand for the underlying security, while a decline in A/D indicating a decline in the demand for the underlying security. When A/D increases the price of the underlying security is expected to rally and when the A/D decreases the price is expected to drop. However, when this price continues to rally while A/D declines or continues to fall when A/D increases divergence between A/D and the price occurs. This is the key signal that A/D provides and indicates that a price reversal is probable.
Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.
Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!
The market strength can refer to the broader market as in an All Share Index, or it can refer to the probable strength of a particular trend of a given stock or commodity. When it is used to refer to the broader market index, the number of advancing and declining stocks in a market are taken into consideration. When it is used to refer to a particular stock or commodity, volume or open interest is taken into consideration.
The popular Market Strength indicators for individual stocks and commodities include On Balance Volume (OBV), Accumulation/Distribution, ...
On Balance Volume
On Balance Volume (OBV) is a market strength indicator developed by Joe Granville to determine positive and negative volume flow for a given security by comparing volume to price movements. It is a simple indicator that adds a time-frame's volume when the closing price is up and subtracts the time-frame's volume when the closing price is down. OBV is a running cumulative total of this volume.
If the closing price is higher than the previous closing price, then the new OBV is calculated using the formula: OBV = current Volume. Otherwise the new ...