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

The accumulation/distribution indicator (A/D) is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed.

The A/D measure seeks to identify divergences between the stock price and the volume flow.

This provides insight into how strong a trend is.

If the price is rising but the indicator is falling, then it suggests that buying or accumulation volume may not be enough to support the price rise and a price decline could be forthcoming.

The Accumulation/Distribution Indicator (A/D) Formula

MFM = (Close − Low) − (High − Close) / (High − Low)

Where:
MFM = Money Flow Multiplier
Close = Closing price
Low = Low price for the period
High = High price for the period

Money Flow Volume = MFM × Period Volume

A/D = Previous A/D + CMFV

Where:
CMFV = Current period money flow volume

How to Calculate the A/D Line

Start by calculating the multiplier. Note the most recent period’s close, high, and low to calculate.
Use the multiplier and the current period’s volume to calculate the money flow volume.
Add the money flow volume to the last A/D value. For the first calculation, use money flow volume as the first value.
Repeat the process as each period ends, adding/subtracting the new money flow volume to/from the prior total. This is A/D.

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

The A/D line helps to show how supply and demand factors are influencing price. A/D can move in the same direction as price changes or in the opposite direction.

The multiplier in the calculation provides a gauge for how strong the buying or selling was during a particular period. It does this by determining whether the price closed in the upper or lower portion of its range. This is then multiplied by the volume. Therefore, when a stock closes near the high of the period’s range and has high volume, it will result in a large A/D jump. Alternatively, if the price finishes near the high of the range but volume is low, or if the volume is high but the price finishes more toward the middle of the range, then the A/D will not move up as much.

The same concepts apply when the price closes in the lower portion of the period’s price range. Both volume and where the price closes within the period’s range determine how much the A/D will decline.

The A/D line can help assess price trends and potentially spot forthcoming reversals. If a security’s price is in a downtrend while the A/D line is in an uptrend, then the indicator shows there may be buying pressure and the security’s price may reverse to the upside. Conversely, if a security’s price is in an uptrend while the A/D line is in a downtrend, then the indicator shows there may be selling pressure, or higher distribution. This warns that the price may be due for a decline.

In both cases, the steepness of the A/D line provides insight into the trend. A strongly rising A/D line confirms a strongly rising price. Similarly, if the price is falling and the A/D is also falling, then there is still plenty of distribution and prices are likely to continue to decline.

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

Both of these technical indicators use price and volume, albeit somewhat differently. On-balance volume (OBV) looks at whether the current closing price is higher or lower than the prior close. If the close is higher, then the period’s volume is added. If the close is lower, then the period’s volume is subtracted.

The A/D indicator doesn’t factor in the prior close and uses a multiplier based on where the price closed within the period’s range. Therefore, the indicators use different calculations and may provide different information.

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

The A/D indicator does not factor in price changes from one period to the next, and focuses only on where the price closes within the current period’s range. This creates some anomalies.

Assume a stock gaps down 20% on huge volume. The price oscillates throughout the day and finishes in the upper portion of its daily range, but is still down 18% from the prior close. Such a move would actually cause the A/D to rise. Even though the stock lost a significant amount of value, it finished in the upper portion of its daily range; therefore, the indicator will increase, likely dramatically, due to the large volume. Traders need to monitor the price chart and mark any potential anomalies like these, as they could affect how the indicator is interpreted.

Also, one of the main uses of the indicator is to monitor for divergences. Divergences can last a long time and are poor timing signals. When divergence appears between the indicator and price, it doesn’t mean a reversal is imminent. It may take a long time for the price to reverse, or it may not reverse at all.

The A/D is just one tool that can be used to assess strength or weakness within a trend, but it is not without its faults. Use the A/D indicator in conjunction with other forms of analysis, such as price action analysis, chart patterns, or fundamental analysis, to get a more complete picture of what is moving the price of a stock.

Concluding Thoughts

The Accumulation/Distribution Indicator (A/D) provides valuable insights into the underlying supply and demand dynamics of a security, helping traders confirm trends or spot potential reversals.

However, as with any technical indicator, it has its limitations, and traders should use it in conjunction with other tools and analysis methods to make informed trading decisions.

The Money Flow Index (MFI) is a technical oscillator that combines both price and volume data to identify overbought or oversold conditions in an asset.

It can also detect divergences that signal potential trend reversals.

The MFI is unique because it incorporates volume into its calculations, making it different from other oscillators like the Relative Strength Index (RSI), which only considers price.

How to Calculate the Money Flow Index

1. Calculate the typical price for each period.
2. Determine if raw money flow is positive or negative by comparing the typical price of the current period with the previous period.
3. Multiply the typical price by volume to calculate raw money flow.
4. Add up positive and negative money flows over the past 14 periods to find the money flow ratio.
5. Calculate the MFI using the money flow ratio.

What the Money Flow Index Tells You

• Overbought and Oversold Signals: An MFI reading above 80 signals that an asset may be overbought, while a reading below 20 suggests it may be oversold. Traders may look for potential reversals after these signals.
• Divergences: If the MFI moves in the opposite direction to the price, it may indicate a potential reversal. For instance, if the MFI declines while the price continues to rise, it could signal a bearish reversal.

Difference Between MFI and RSI

While the MFI incorporates volume into its calculation, the RSI only uses price data. This means that MFI might provide signals faster or more accurately in certain cases since volume is often viewed as a leading indicator.

Limitations of the MFI

• False Signals: The MFI can generate false signals, indicating a potential trade that doesn’t result in the expected price movement.
• Missed Signals: The MFI may not always indicate important market reversals, especially if divergences don’t appear.

Concluding Thoughts

The Money Flow Index (MFI) is a useful tool for traders looking to incorporate volume into their technical analysis.

By offering insights into overbought and oversold conditions, as well as potential divergences, the MFI can help traders spot trends and reversals.

However, like any indicator, it should be used in conjunction with other technical tools to reduce the risk of false signals and improve overall trading strategies.