The accumulation/distribution indicator is a measure of a stock that focuses on how much volume is being bought (accumulated) and sold (distributed) and at what price over time.
If traders are accumulating a particular stock as the price declines, the stock becomes in demand because the majority of the traders think the prices will start to rise. This shows a trend of rising prices. Since the A/D indicator and price are moving in the same direction, the confidence is high that the current trend will continue
If the volume being distributed starts to increase while prices are rising, this could indicate selling pressure, meaning the majority of traders think that the price is going to decline making the stock less valuable. Again, since the A/D indicator and price are in agreement, the confidence is high that the trend will continue.
If the A/D indicator and price diverge, in other words, one goes up while the other goes down, this could be an important signal. If the A/D indicator goes down while the price goes up, this could indicate prices are soon going to reverse and go down. If the A/D indicator goes up and the price goes down, this could indicate prices are about to be on the rise. Check out tradingview’s advanced charting tools
On-Balance Volume
One of the ways to measure the accumulation/distribution indicator is the on-balance volume technique. This is a simple tool that was developed by Joseph Granville in the 1960s.
Comparing a volume histogram to the price bar graph will help graph the level of buying and selling over time, sometimes discovering new trends before the price starts to indicate a trend change.
Chaikin Money Flow (CMF)
Another tool to measure the accumulation/distribution indicator is the Chaikin Money Flow which was developed by Marc Chaiken in the early 1980s.
The standard period for this measurement is 21 days and during this time the high and low closing prices are noted. The principle for this indicator is that if the price closing value, on a given day, is nearer to the price high marker for that period, the more buying has occurred. And on the flip side, the closer the price value is to the price low marker of those 21 days, the more selling has occurred.
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