Question:
What is the “Accumulation/Distribution” indicator used for…I have been using it to help me identify the reliability of trends, but I don’t know if I’m using it correctly. Nobody seems to know what it is used for.
Thanks Ed, u r doing a good job.
Garfield form Accumville
Answer:
Garfield, as a writer, the abbreviating of our language (u r = you are) is somewhat distressing, but, as with all things, change will come. In any case, quite a few people know why traders use the Accumulation/Distribution indicator (ADI), and I am just one of them.
Simply, the ADI mathematically assesses the cumulative flow of money into and out of a stock based on volume and price changes over time. The basic premise of the ADI is that volume movement precedes price changes. Generally, when a stock advances or declines in a trend, the volume increases. The point of this indicator is to identify momentum in price movement. Using a mathematical formula, ADI identifies divergences between stock price and volume flow, which gauges supply and demand, which tells us whether investors are “accumulating” (buying) or “distributing” (selling) a certain stock.
Remember, time is a factor with this indicator, and you have to learn how to apply the indicator in a specific timeframe. For example, be wary of a divergence that is relatively new, say two weeks or less. This could be “false positive,” which means the trend could change on you. Give the indicator a bit more time to be sure that it is accurate. If a divergence is happening over a month or two, this probably indicates a strong trend.
All technical indicators are just tools that guide you to a conclusion. Not one can predict 100% accurately. This is because our collective psychology ultimately drives all markets, which means markets are fickle, subject to emotional action and reaction. What might seem like a “sure” trade based on ADI might turn out to be a bust if a piece of news pops up that suddenly changes the volume, the price, and, ultimately, the momentum. Adding ADI to your toolbox of indicators is good, but be careful that you don’t rely on it solely. Use it in conjunction with other indicators to both identify and confirm potential trades.
By the way, thanks for the positive support. It would seem I am accumulating readers as I distribute reasonable information. How’s that for a finish?
Trade in the day; invest in your life …
