Understanding The Accumulation/Distribution Index
The A D Indicator (or Accumulation Distribution Index) is a price-volume relationship that technical analysts use to confirm trends.
By comparing A/D to the price direction and other indicators, traders can anticipate trend continuations, weakenings, and reversals.
“Accumulation/Distribution looks at the proximity of closing prices to their highs and lows to determine if accumulation or distribution is occurring in the market.”
Kirkpatrick II, C. D.
How to Read Accumulation Distribution
In charting tools, the A/D is a leading indicator that measures the cumulative token volume in the vertical axis. This value is expressed in cryptocurrency units and changes for every exchange.
For example, in the chart above, the total price-adjusted volume has increased to 28.96 billion tokens. In general, an increasing A/D means that the price will likely keep increasing (the opposite is also true).
However, if the A/D cumulative volume is too low or almost moving sideways, it can lead to false signals. To prevent this, the recommended time frame is between 4 hours and 1 week.
How Does Accumulation Distribution Indicator Work?
Here’s the accumulation distribution indicator explained with its formula:
As an A/D indicator formula example, here are the starting conditions:
- Bitcoin has a previous AD line of 5,000
- In 24h, Bitcoin closes at $70K, swinging between two extremes: the $65K low and the $72K high
- In the same time frame, the measured exchange records a volume of another 5,000 BTC
When applying the formulas:
MFM = (($70K – $65K) – ($72K – $70K)) / ($72K-$65K) = $3K/$7K = 0.43
MFV = 0.43 * 5,000 = 2,150
New AD Line= 5,000 + 2,150 = 7,150
Even though Bitcoin reached lower lows than highs, the A/D indicator went up by +43%, which is very bullish.
To consider other examples:
- High volume and prices closing near the low lead to negative MFMs and bearish trends (e.g. $66K instead)
- High volume and prices closing near the high lead to positive MFMs (example above) and bullish movements
- Prices closed right between the low and high are undefined trend
Interpreting Accumulation/Distribution Signals
Assuming there is sufficient volume, traders can compare the A/D line with the price direction to recognize these patterns:
- Prices go up, AD goes up: Bullish signal that confirms an uptrend or its continuation.
- Prices go down, AD goes down: Bearish signal that confirms a downtrend or its continuation.
- Prices go up, AD goes down: Bearish divergence for a potential uptrend reversal or weakening.
- Prices go down, AD goes up: Bullish divergence for a potential downtrend reversal or weakening.
- Sideways prices, AD goes up: Potential breakout upwards.
- Sideways prices, AD goes down: Potential breakout downwards.
Below is a case C example:
When signals trigger near support or resistance levels:
- A/D Increasing at Support indicates strong buying interest. Potential downtrend reversal.
- A/D Decreasing at Support suggests weak buying interest. Potential support failure and breakout.
- A/D Increasing at Resistance reflects strong buying pressure. Potential resistance breakout.
- A/D Decreasing at Resistance shows weak buying pressure. Potential uptrend reversal.
Conclusion
The accumulation distribution line is a valuable leading indicator to identify crypto price trends as well as their strength. It’s the missing piece for oscillators such as the RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence). Those are useful for identifying potential entry points, but whether or not they have profit potential depends on the overall market trend, which the A/D reveals.
Kirkpatrick II, C. D. (2020). Understanding Indicators in Technical Analysis. Fidelity.com.
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/learning-center/Understanding-Indicators-TA.pdf
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