The accumulation/distribution indicator is one of many tools investors use to predict future price movements. It is part of an overall system for predicting price trends based on technical analysis principles. It measures the relationship between supply and demand and provides a visual representation of those relationships in terms of the number of shares being accumulated or distributed.
Keep reading to learn more about accumulation/distribution indicators.
What is Accumulation/Distribution (A/D) Indicator
An A/D indicator is a cumulative indicator that tries to identify the divergence between the stock price and volume flow.
A/D is a cumulative indicator, meaning one period’s values are added to the last period’s value. The term accumulation implies the level of demand for a stock, and distribution denotes the level of supply of a stock. An A/D indicator assesses whether the stock is currently getting accumulated or distributed in an attempt to predict possible future price movements. For example, If there is a price rise, but the accumulation or buying indicator is falling, then it suggests that the buying volume may not be enough to support the price rise, and there can be a price fall soon.
How to Use the Accumulation/Distribution Indicator
The main idea behind the A/D indicator is that volume precedes the price – the number of shares traded is related to the asset’s price movement.
A rising A/D line indicates that the market is in an accumulation/buying phase and a falling line indicates the selling phase. Checking the direction of the A/D line about the prices will help us predict future stock movements and take up a position on the assets we possess.
Here are some signals to watch out for to make the correct predictions :
– When the A/D indicator line and stock prices both move up, then this upward trend is likely to continue for a while
– When the A/D indicator line and the price go down or make low troughs and peaks, it is an indicator that this downward trend will continue.
– When the A/D indicator line makes lower highs than the prices, we may see a downtrend in the stocks.
– When prices remain low, but the A/D line moves upward, the stock may reverse to an uptrend soon.
The divergence is an important signal which indicates that there might be a change in the current trend. This straightforward concept makes it an effective tool for predicting market trends.
The A/D indicator gives us an overall idea of the market’s money flow in a given period and helps us make informed trading decisions. However, using the A/D indicator in conjunction with other analysis tools is recommended.
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