What is the Accumulation/Distribution (A/D) indicator?
– The A/D indicator is a running (cumulative) technical measure that combines price action and trading volume to estimate whether market participants are more often buying (accumulating) or selling (distributing) a security over time. It tries to reveal whether the flow of money behind price moves supports the prevailing trend or suggests weakening.
Key definitions
– Money Flow Multiplier (MFM): a number between −1 and +1 that measures where the period’s close sits inside that period’s high–low range. A close near the high produces a positive multiplier; a close near the low produces a negative multiplier.
– Money Flow Volume (MFV): the MFM multiplied by that period’s volume. It scales the multiplier by actual volume.
– A/D line: the cumulative sum of Money Flow Volume across periods. Each period’s MFV is added to the prior A/D value.
Formulas (clear, stepwise)
1. Money Flow Multiplier (MFM)
MFM = [(Close − Low) − (High − Close)] / (High − Low)
– If High = Low for the period, treat MFM as 0 to avoid division by zero.
2. Money Flow Volume (MFV)
MFV = MFM × Volume
3. Accumulation/Distribution (A/D)
A/D_current = A/D_previous + MFV
– Start the series with an initial A/D (often 0) and update cumulatively.
How to calculate the A/D line — step-by-step
1. For each period (minute, day, week, etc.) record High, Low, Close, and Volume.
2. Compute MFM using the period’s High, Low, Close.
3. Multiply MFM by the period’s Volume to get MFV.
4. Add MFV to the previous A/D value to get the new A/D.
5. Plot the cumulative A/D line beneath the price chart or compare it directly to price movements.
Worked numeric example
Assume a daily bar with:
– High = $50.00
– Low = $46.00
– Close = $49.00
– Volume = 1,000,000 shares
– Prior A/D = 2,000,000 (units of volume)
Step 1 — MFM:
MFM = [(49 − 46) − (50 − 49)] / (50 − 46) = (3 − 1) / 4 = 0.5
Step 2 — MFV:
MFV = 0.5 × 1,000,000 = 500,000
Step 3 — Updated A/D:
A/D_new = 2,000,000 + 500,000 = 2,500,000
Interpretation: The close was near the top of the range and volume was high, so the A/D increased considerably, indicating buying pressure for that period.
What the A/D line tells you (interpretation guidelines)
– Confirming trends: If price and A/D trend in the same direction (both up or both down), the move is likely supported by volume and therefore stronger.
– Divergences: If price makes a new high while A/D does not, that may indicate inadequate buying support (potential distribution) and a possible future price reversal. Conversely, price making new lows while A/D trends higher may signal hidden accumulation.
– Steepness matters: A sharp rise or fall in the A/D line implies strong volume-weighted buying or selling; shallow slopes imply weaker conviction.
How A/D differs from On-Balance Volume (OBV)
– OBV compares the current close to the previous close: if the close is higher, it adds the full period volume; if lower, it subtracts the full volume. OBV ignores where in the high–low range the close occurred.
– A/D instead weights volume by where the close fell inside the period’s range (MFM). Because of this, the two indicators can diverge and provide different messages about volume flow.
Common limitations and practical cautions
– No prior-close information: A/D only considers the close relative to the current period’s range. Large overnight gaps or wide moves relative to the previous close can create counterintuitive A/D readings (for example, a big gap down that finishes near the day’s high can still produce a positive MFV).
– Divergences can persist: A mismatch between price and A/D is a sign to watch, not a precise timing signal. Divergences may last a long time before (if ever) resolving.
– Data quality: Reliable volume data is essential. Avoid applying A/D to assets with poor or irregular volume reporting (thinly traded OTC stocks, some futures/ETFs without accurate intraday volume).
– Use other tools: Treat A/D as one input. Combine it with price action, chart patterns, momentum indicators, or fundamental checks for a fuller view.
Checklist — quick reference before using A/D
– Compute MFM and MFV for each period and accumulate.
– Plot A/D alongside price on the same timescale.
– Look for confirmation: price trend + A/D trend in same direction = stronger signal.
– Watch for divergences and mark any large gaps or anomalous bars that might skew interpretation.
– Compare A/D to OBV for an alternative volume perspective.
– Verify volume data quality and use multiple timeframes.
– Never rely solely on A/D for trade timing or position sizing.
Practical tip
– Mark large intraday gaps and unusually high-volume days on your chart. These events can push the A/D line sharply and may require manual interpretation rather than automatic signals.
Sources (for further reading)
– Investopedia — Accumulation/Distribution (A/D) Indicator
https://www.investopedia.com/terms/a/accumulationdistribution.asp
– Fidelity Learning Center — Accumulation Distribution
https://www.fidelity.com/learning-center/trading-investing/technical-analysis/accumulation-distribution
– StockCharts ChartSchool — Accumulation/Distribution Line
https://school.stockcharts.com/doku.php?id=technical_indicators:accumulation_distribution
– TradingView Wiki — Accumulation/Distribution
https://www.tradingview.com/wiki/Accumulation/Distribution
Educational disclaimer
This explainer is for educational purposes only and does not constitute personalized investment advice, a recommendation to buy or sell securities, or a trading strategy. Always perform your own research and consider consulting a licensed financial professional before making investment decisions.