The Accumulation/Distribution (A/D) indicator can determine buying and selling pressures of a currency pair as it helps identify the relationship between the currency pair's price and volume. Let's take a look at everything traders should know about the A/D indicator in-depth.
What is the Accumulation/Distribution indicator?
The Accumulation/Distribution is a volume-based indicator used in technical analysis that can measure the strength of a forex trend and confirm breakouts or trend divergence. It uses the volume of currency pairs being traded to identify if the selling or buying pressure is higher in the market.
- When the A/D indicator and currency pair price move in the same direction, it indicates strong current trend.
- When the A/D indicator and currency pair price move in the opposite direction, it indicates weak current trend or even signals for a reversal.
This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.
A step-by-step guide on calculating the Accumulation/Distribution indicator?
The A/D indicator is calculated using the following formula: A/D = [(Close price - Low price) - (High price - Close price)] / (High price - Low price) x Volume Here's how to calculate the A/D indicator step by step: 1. Determine the closing price, high price, and low price for the given period. The period can be any timeframe, such as daily, weekly, or monthly. 2. Calculate the money flow multiplier (MF measures the strength of buying and selling pressure in the forex market by taking into account both price and volume data) for each period using the following formula: MF = ((Close price - Low price) - (High price - Close price)) / (High price - Low price) 3. Calculate the money flow volume (MFV measures the flow of money in and out of a currency pair over a specific period of time) for each period by multiplying the given money flow multiplier by the volume: MFV = MF x Volume 4. Calculate the cumulative money flow volume (CMFV measures the summation of all the money flow volumes calculated during a specific time period) for each period by adding the current period's MFV to the previous period's CMFV. 5. Calculate the Accumulation/Distribution indicator for each period by using this formula: A/D = Current period's CMFV - Previous period's CMFV
What signals does the Accumulation/Distribution indicator provide?
Bullish signals
When the currency pair price is in a downtrend, but the A/D line is trending in the upward direction, it signals a bullish market reversal and indicates an increased buying pressure.
Bearish signals
When the currency pair price is in an uptrend, but the A/D line is trending in the downward direction, it signals a bearish market reversal and indicates increased selling pressure.
Overbought/oversold signals
The A/D indicator signals an overbought market condition when its value goes beyond 70, suggesting a downward price correction in the near future. On the other hand, any values below 30 indicate an oversold market condition, suggesting an upward price correction.
Breakout signals
The A/D indicator confirms breakout signals with the help of key support and resistance levels. When the A/D line moves in the same direction as the price breakout, it can help confirm the breakout direction. If the A/D line is closer to the resistance line, there is a higher chance of an uptrend breakout. But if the A/D line is closer to the support line, there is a higher chance of a downtrend breakout
Benefits of using the Accumulation/Distribution indicator
Shows a balance between supply and demand
The A/D indicator shows a balance between the currency pair's supply and demand by measuring the buying and selling pressures of the currency pair over a specific time period. The A/D line is closer to zero when there is a balance between supply and demand, indicating the market is not volatile. However, the A/D indicator is positive when there is more buying pressure (more demand), and A/D is negative when there is more selling pressure (more supply). This helps traders trade both bullish and bearish markets by placing long and short orders, respectively.
Assess price trends
The A/D indicator can help assess if the currency pair is currently in a bullish or bearish price trend. A rising A/D line indicates bullish price trend and a falling A/D line indicates bearish price trend
Acts as a confirmation signal
The A/D line acts as a confirmation signal for trend continuations, divergences and even breakouts.
- When the A/D line moves along with the prices, it confirms the continuation of the existing trend.
- When it moves against the currency pair prices, it confirms trend reversal.
- When the A/D line breaks above the resistance level, it confirms a breakout.
- When it breaks below the support level, it confirms a breakdown.
This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.
Monitors overall money flow
The A/D line monitors the overall money flow by measuring the buying and selling prices based on the currency pair's volume and price action. The A/D line begins at the base value of zero and signals money flow in the market is higher. If the A/D line is rising and the current currency pair price closes higher than the previous closing price, this signal is confirmed and vice versa.
This graph has been recreated from the original source. Please note this image is a representation only and is not provided as general or personal advice.
It is important to keep in mind that no technical indicator is 100% accurate, and it can be helpful to use the A/D indicator in combination with other technical indicators and fundamental analysis to obtain a comprehensive understanding of market conditions.
Utilise the Accumulation/Distribution indicator in the price chart
By adding the A/D indicator into the price chart can help traders confirm market signals based on the currency pair's currently traded volume. This volume-based indicator can also be used with other technical analysis tools to improve precision with trading signals. Start trading with Blueberry. Sign up for a live account or try a demo account.
Disclaimer:
- All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. Traders should carefully consider their objectives, financial situation, needs, and level of experience before entering into any margined transactions.