What is accumulation distribution indicator?

Accumulation distribution indicator (ADI) is a technical analysis indicator used to measure the degree of overbought and oversold markets. ADI is calculated by adding the up and down changes in the stock prices of a given security or group of securities and dividing the total by the total number of stocks in that security or group. ADI ranges from 0 (oversold) to 1 (overbought).

As the ADI moves closer to 1, it suggests that there is more buying pressure than selling pressure prevailing in the market. This results in higher stock prices and, consequently, increased profits for those who are able to capitalize on this trend. It helps to assess the risk of an investment. ADI calculation shows how much a security's price has fluctuated around its average price over a given period of time.

How to Calculate Accumulation Distribution Indicator?

The Accumulation Distribution Indicator (ADI) is a technical analysis indicator used to measure the distribution of a security's price movements. ADI is calculated as the ratio of the standard deviation of a security's price movement to its median price movement.



$$\mathrm{AD\:=\:\sum\frac{(close\:-\:low)\:-\:(high\:-\:low)}{(high\:-\:low)}\:\times\:volume}$$

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

A/D lines illustrate how supply and demand affect prices. It is possible for A/D to move along with or in opposition to price movements.

During a given period, the multiplier measures the strength of the buying or selling. It is determined by determining if the price closed in the upper or lower half of its range. Afterwards, the volume is multiplied by this. Consequently, high volume combined with a close near the high of the range results in a huge A/D jump. In the alternative, if the price finishes near the top of the range but the volume is low, or if the volume is large but the price finishes near the bottom of the range, the A/D will not rise as much.

Similar concepts apply if a price closes within the lower half of a period's price range. During a period, the A/D decrease is affected both by volume and by where the price closes.

Conclusion

 

Accumulation distribution indicators are useful tools for identifying volume forces driving pricing actions. As a result, the A/D indicator can provide insight into possible stock price movements by assessing market buying and selling pressure.