Accumulation Distribution Line

The Accumulation Distribution Line or A/D indicator for short is the brainchild of Mac Chaikin, who is well known for designing other popular indicators such as Chaikin Oscillator, Chaikin Money Flow and so on. The indicators designed by Marc Chaikin have been heavily used for the futures and the equity markets and have also found their use in the Forex markets. Firstly the Accumulation Distribution Line should not be confused with the Advance/Decline line, which is also called as the A/D oscillator.

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The Accumulation Distribution Line was initially used in the stock markets to gauge the buying and selling power. A strong trending A/D line typically reflected strong buying power and prices would continue to rise. Likewise, when the A/D line starts to the fall, it indicates weakness in the buyers and an increase in selling pressure resulting in prices eventually declining.

When applying the A/D line indicator to the charts, they look as follows.

How to trade with the Accumulation/Distribution Line?

The Accumulation/Distribution line is mostly used to monitor the money flow and thus when there is a positive correlation, prices and the A/D line tend to rise and fall in tandem. As such, the A/D line indicator can be used to trade with price action methods such as trend lines and support/resistance levels. The first chart below shows a few examples of how trend lines and horizontal support/resistance levels can be plotted on the A/D line. Notice how support/resistance levels are plotted on chart and when the A/D line dips to support and rises, prices rally in tandem as well. Likewise, plotting trend lines on the A/D line and the resulting trend line break out results in prices staging a rally as well.

Accumulation/Distribution trading with price action

Another way to use the Accumulation/Distribution line is to spot divergences. When prices fail to confirm the A/D’s highs and lows a price divergence points to short term momentum led rallies as illustrated in the chart below.

Accumulation/Distribution trading with divergences

The red lines point to various instances of bullish and bearish divergences between prices and the A/D line indicator. When prices make a high and the A/D line fails to confirm the higher high, a bearish divergence see’s prices falling back. Similarly when lows in prices are not confirmed by the A/D line, the bullish divergence see’s prices rallying strongly. As far as divergence based trading is concerned, the A/D line divergence follows the same rules as you would trade any divergences.

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The Accumulation/Distribution indicator works similar to the On Balance Volume albeit with a few minor differences. Traders should note that the A/D indicator was originally built for the equity markets and it works best on other markets as well as long as they are centralized. This is because volume plays an important role in calculating the A/D line. With forex, due to the fact that trading is not centralized, the volume variable can be different from one broker to another and therefore, traders can notice subtle differences in the way the Accumulation Distribution  line is plotted.