How To Use Accumulation/Distribution (A/D)
Accumulation/Distribution is a price and volume indicator that was developed by Larry Williams; the designer of many Technical Analysis tools such as the Williams %R indicator.
The Accumulation/Distribution indicator is used to determine if market sentiment is either buyer or seller oriented by analyzing the position of the indicator against that of price. The A/D indicator is, in fact, a variant of the popular ‘On Balance Volume’ indicator.
If the A/D indictor is rising with relation to the price then this implies that the commodity or security, of interest, is being accumulated or bought. In contrast, a falling A/D reading indicates a sellers’ market epitomized by commodity distribution.
Larry Williams designed his indicator so that when divergences begin to emerge between the A/D and price then this is indicative that a change in the price direction could occur soon – see diagram.
To optimize the use of the Accumulation/Distribution indicator, its following key features need to be understood.
Williams’s studies eventually concluded that the easiest method of determining accumulation was by defining buying pressure as the price movement from the day’s low to its close. Likewise, distribution could best be considered as the selling pressure denoted by the price movement from the day’s high to its close.
In simple terms, Williams then calculated the value of the A/D indicator by subtracting the Accumulation from the Distribution; then multiplying this result by sales volume and then dividing that value by the price movement from its lowest to highest point during the selected trade period.
From his research, Williams showed that an indicator calculated in such a way prompted buying when it was at its lowest points and selling whilst at its peaks.
As already stated, when the A/D indicator rises, then the driving force behind the market are the buyers of the commodity or security whilst if the A/D indicator falls then the sellers are the dominate force.
The most important feature that the user must grasp concerning the A/D indicator is that when discrepancies emerge between its readings and price action, then the current price direction is very likely about to reverse.
For instance, if the price is falling and the A/D indicator has started to rise, this usually signals that a reversal in price action is imminent. Williams’s research also showed that, in the majority of cases, price action had a predominant tendency to move in the direction of the Accumulation/Distribution indicator.
The A/D indicator is defined by fluctuations of price and volume. Williams used volume to act as a weighting factor with regards to predicting price change. In particular, larger volumes produce a higher probability that a price direction could turnabout in the very near future.
In conclusion, the Accumulation/Distribution Indictor is best deployed to provide advance notice of possible changes in the price direction of the commodity, security or investment, of interest.
The indicator produces better results using longer time frames i.e. daily upwards because their associated statistics tends to be more reliable than those of shorter intervals. Basically, the user needs to detect Accumulation/Distribution Indicator peaks for selling opportunities whilst pinpointing troughs for buys.