What is the Accumulation / Distribution indicator?
Well, a volume type indicator created by Marc Chaikin which tries to measure the amount of money that goes in and out of an asset. Originally, this author called it something like Cumulative Money Flow Line, but finally decided on the other name, something more practical, maybe.
As always, the purpose of this indicator is to provide possible signals of purchase or sale if a continuation or change of trend in a financial asset can be foreseen.
Calculation of the Accumulation / Distribution indicator
We will have to apply three formulas that will be related to each other.
Money Flow Multiplier (MFM) = ((close – minimum) – (maximum – close)) / (maximum – minimum)
With this we can calculate the following:
Money Flow Volume (MFV) = Money Flow Multiplier x Volume of the period
And in the end we already have the AD (Accumulation / Distribution)
AD = Previous AD + Current Period of Money Flow Volume.
Accumulation / Distribution Example
Let’s suppose an example with:
Closing = 150; minimum = 149; maximum = 152; volume = 10,000
MFM = -0.33
MFV = – 3,300
Next period x + 1:
Closing = 148; minimum = 146; maximum = 151; 12,000 volume
MFM = -3/5 = -0.6
MFV = – 7,200
AD = -10,500
Next period x + 2
Closing = 154; minimum = 147; maximum = 154; 5,000 volume
MFM = 1
MFV = -5,000
AD (x + 2) = -10,500 + 5,000 = -5,500
Basically if the price goes up the AD will go becoming more positive, if it is the contrary, it will go to negative, but this will also depend on the amount of the volume.
In a graph if the asset is strongly bullish the logical thing is to have a positive AD that is increasing.
On the contrary, if we have an asset that is strongly bearish we should have a negative AD that decreases over time.
Two perfect examples of opposite cases are: Amazon and Sears, two actions with opposite tendencies.
Interpretation of the Accumulation / Distribution Indicator
The interpretation of this indicator is simple: if the price goes up you have to wait for an increasing AD.
On the contrary if it is decreasing.
That is, if the AD is increasing is that we have an asset that is going up and the logical thing would be that we would have to go bullish in it.
However, since volume plays an important role in this indicator, we can give the fact that we have the price of a stock rising but the declining AD could give us clues about a distribution and a weakening of the rise, which could be “sale signal “.
On the contrary, a downward trend in the price with higher AD data could indicate upward pressure and a possible rebound in sight.
This is in theory, but as always with these cases, sometimes it works and other times it does not work.
We can see examples of when it works and examples of when it fails.
It is not that by applying this theory, you are going to become rich.
Therefore, it is always advisable to use this indicator with other indicators, trend analysis, stock figures, and try to find a combination that can “work”.
There are people who use it with the RSI, others with the MACD, or simply applying common sense and looking for important divergences, such as when the indicator does not mark new minimums when the price of the asset does.
Example of how to use the AD more or less efficiently
This indicator works more or less well when we apply it in long-term trading and investment with strong stocks, such as Google (Alphabet).
If we patiently keep to the moments of crisis in the price of the stock, as for example, at the beginning and end of 2014, we can see how in those bearish corrections there are usually moments of divergence between the indicator and the price trend.
Those moments are quite common in the intermediate bear markets of stocks that have secular bull markets.
What we have is a divergence like the one I mentioned earlier with the example of Apple, in which the price is setting new lows but the AD begins to mark higher lows than the previous ones, indicating that the price is falling but the volume starts to rise, which in this case means that possible strong hands are buying again with something more “valueable”, starting to accumulate stocks when they already give a better entry point.
For example, in the second correction, at the end of 2014, we had this divergence when the price was still around 500 dollars, almost 20% below the previous maximum.
That was a great moment both for bullish speculative trading operations, and simply for long-term investment.
Later, Google followed its bullish secular market, with significant rises, as often happens in any bull market of this type.
This will not always happen, obviously, and we can always fall into the trap of buying at times similar to this in the middle of the beginning of a bearish secular market, like the one of 2008 or others that have been in Europe later.
That cannot be avoided by everyone.
The only thing we can do from a trading point of view is to use the stop and try to lose as little as possible.
If what we do is invest then we will have bought with a discount, which is not bad, but we will have to pray that the bear market is not too big, like the Great American Depression or the collapse of the Greek Stock Exchange years ago, among others.
For example, in 2008 Google gave us a similar “signal” when it had fallen around 40% from maximums.
Still, as it was a significant bear market, the price continued to drop much more, to 125, and having invested in the 220, we would be very worried, no doubt.
However, from a long-term point of view, in the end Google ended up recovering a lot, which even as an investment would have been a good purchase with value.
But of course, not all cases are Google.
We could also buy the wrong stock.
In my opinion it is not an indicator that I use, at least to this day, but it does not stop being interesting, and I think that by studying it a bit more we could get something out of it in certain situations.
However, the fact of using raw data volume and price makes the value of it have figures that make it complicated to use from an “automatic” or “objective” point of view.
By not smoothing between values type 0 or 100, it is an indicator with which we will have problems to use from a pure technical point of view.
In this sense, it is a more qualitative than quantitative indicator, and if we want to use it we will have to apply our own “quality” analysis.
Original article: Cómo usar el indicador Acumulación/Distribución