What is Accumulation/Distribution
Accumulation/distribution is a momentum indicator that attempts to gauge supply and demand by determining whether investors are generally buying (accumulating) or selling (distributing) a certain stock. The accumulation/distribution measure seeks to identify divergences between stock price and volume flow. The accumulation/distribution of a security is calculated by first calculating the money flow multiplier and then multiplying the money flow multiplier by the period's volume.
BREAKING DOWN Accumulation/Distribution
Accumulation/distribution is typically drawn as a line on a technical analysis chart. Its value at each charted point is derived by multiplying the money flow multiplier times the period’s volume.
The money flow multiplier is calculated by finding the difference between the closing price and the low price of the range and the high price of the range minus the closing price.
(close – low) – (high - close)
This value is then divided by the high minus the low.
(close – low) – (high - close) / (high – low)
The final sum is the money flow multiplier. The money flow multiplier is then multiplied by volume to determine accumulation/distribution.
The accumulation/distribution line is generally used as an overlay to price, helping to show how supply and demand factors are influencing price. Accumulation/distribution can move in the same direction as price changes or it may have an inverse slope.
Generally, a positive sloping accumulation/distribution would show that the closing to low price gap is stronger than the high to close price gap and accumulation demand is occurring. A negative sloping accumulation/distribution line would show the opposite, with a high to close price gap stronger than the close to low representing distribution and selling pressure. The volume of the security would then affect the steepness of the line’s slope. Therefore, higher volume would create a steeper positive or negative sloping line.
If a security's price is in a downtrend while the accumulation/distribution line is in an uptrend, the indicator shows there may be buying pressure and the security's price may reverse. This results from higher close to low values signaling a push higher at the day’s close.
Conversely, if a security's price is in an uptrend while the accumulation/distribution line is in a downtrend, the indicator shows there may be selling pressure, or higher distribution. In this case the close to high value is stronger creating a negative slope, often with a push lower at the day’s close.
In both cases, the steepness of the accumulation/distribution line would provide insight on the trend overall. Since volume is used in the calculation of accumulation/distribution, a steeper uptrend would indicate that buyer demand and accumulation are having a greater affect. A steeper downtrend would thus indicate that selling and distribution are more intensely affecting price.