Accumulation Distribution Indicator Strategy, Formula

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Accumulation Distribution indicator is a leading indicator that uses the relationship of stock’s price and volume within a specific period of time. When traders buy a stock or accumulate it backed by big volume we assume that in future price may go up. Similarly, when traders sell a stock or distribute it in great volume at a particular time, we assume the price to fall. This indicator is also called as AD or Williams AD indicator.

Also, the accumulation distribution indicator detects price volume divergence. When the price of a stock goes up or down and volume decreases or does not increase, this shows a weakness in the present trend and a trader can be prepared beforehand for an imminent reversal. Trading platforms like Zerodha Kite or Upstox Pro plot this indicator for traders.

Inserting the Accumulation Distribution indicator

On Zerodha Kite

  • Go to MarketWatch.
  • Choose the stock you are going to trade.
  • Right-click on the stock and select a chart from graphic icons.
  • The chart window of the stock opens.
  • Go to studies. Select studies.
  • Go to Accumulation/Distribution and click on it.
  • A small window opens with default parameters of the indicator.
  • We can choose whether to use the volume in the indicator calculation.
  • Once we select the parameters and click the Done command, the parameter window goes off the screen.
  • In this way, we can plot the indicator on the stock price.
Accumulation Distribution Indicator Zerodha

On other trading platforms

Accumulation Distribution indicator is available in other trading platforms like Upstox Pro. Here also you can attach the indicator from the studies section. There is not much difference between the AD indicator in Upstox and Zerodha. Watch the image below to know how the indicator looks like in the Upstox platform.

Accumulation Distribution Upstox

Using volume in indicator calculation

We have already seen that we can choose to use volume in the indicator calculation. The plot changes if we use volume. Check the image below where we plotted the indicator with or without volume.

Accumulation Distribution Indicator Without Volume

Now watch the same Reliance Industries share price chart below with the volume on for indicator calculation. Check the big surge in the indicator due the huge volume spike in single bar.

AD Indicator With Volume

Accumulation Distribution FAQ

What does Accumulation Distribution mean?

The accumulation distribution actually is the relation of a share price along with its trading volume. It calculates where more trading volume is associated with the buys or the sells. In other words, it calculates whether the volume is flowing into a share or it is flowing away from it.

How do you find the Accumulation Distribution Line?

The AD calculation can be plotted as a line and that is called the AD line. All major trading terminals in India now have this indicator. We can find this AD line indicator in the studies section of the leading broker’s terminal like Zerodha Kite or Upstox Pro.

How do you calculate stock accumulation?

The accumulation in any stock can be calculated by how much buying pressure is seen on it. Whenever more buying pressure is seen in a particular stock than selling pressure, it is said to be accumulated. That means that traders are buying (accumulating) this stock.

What is stock market accumulation?

A stock market accumulation means buying in the stock market. When more traders buy a stock a buying pressure is seen on it. That is called the accumulation phase. During the accumulation phase generally, the stock price tends to move up on buying pressure. At the end of the accumulation phase, the stock price peaks.

What does it mean when a stock is under distribution?

When more traders sell a stock a selling pressure is seen in it. This is called a distribution phase. During distribution generally, the stock price moves down due to selling pressure. At the end of the distribution phase, the stock price hits the bottom and again the accumulation phase starts.

Accumulation Distribution Indicator Calculations

Below are the formula or calculations for the AD indicator.

Accumulation Distribution Indicator Formula

How to Trade Using the AD Indicator?

  • If we see that the AD line starts moving down, we would then look for a bearish move in the price.
  • The faster the AD line moves down, the more chance of the price also moving down is there.
  • Similarly, when the AD line starts moving up, we can make an idea that the price may also enter a new bull orbit.
  • We can enter the trade if the price movement is backed by an unusual rise in volume.
  • Exit trade if price volume divergence occurs.

Accumulation/Distribution Trading Strategy

  • The indicator works well in all time frames.
  • We can create a short position when the price goes down accompanied by good volume.
  • The accumulation distribution line (ADL) shows the price trend. Understanding the price trend from ADL is important before creating a position.
  • We can close the short position when the stock price goes up with strong volume or divergence occurs.
  • Similarly, we can create a fresh buy position if the price goes up with strong volume.

Advanced Trading Strategies

Some advanced trading strategies using the AD indicator can also be created. For this, we need to mix and match it with other indicators. For example, we added a 50-period exponential moving average of the AD line. Till the AD line is above its EMA, it’s in the accumulation phase and we will consider only the buy signals. When the Accumulation Distribution indicator moves below its EMA, the price enters the bear phase and we will consider only the sell signals. Check the picture below to understand the setup.

Accumulation Distribution Trading Strategy

Divergence

The accumulation distribution indicator works well in bullish or bearish divergences like the MACD indicator. Traders can use this in their technical analysis by creating Long or Short positions at this divergences and exit when the reverse signal occurs.

Conclusion

The Accumulation Distribution indicator also should be used in conjunction with other indicators. Remember, no single indicator can make money for you. Rather use the indicator as an individual element of a complete trading system.

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Author: Indrajit Mukherjee

Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.

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