The Accumulation/Distribution Indicator (originally called the Cumulative Money Flow Line) tracks cash flow into or out of a security and correlates the cash flow changes to changes in the security price. By following the trading volume into or out of a security, it establishes the degree of correlation between this trading volume and the price of the security.
Accumulation/distribution is designed to reveal divergences in price trends (specifically between stock price and trading volume). These divergences indicate the degree to which a security may be overbought or oversold at a given time.
Traders tend to confidently associate higher trading volumes coupled with price moves as a tell that a security could be locking into a trend. When a security's price moves on low volume, it may mean that the price move is less defined by a trend and may be more a product of low volume volatility. When traders see a price move associated with high and rising volume, he or she may use that as a thesis to trade with the trend.
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The Accumulation/distribution line is also a component of other indcators, like the Chaikin Oscillator. The Chaikin Oscillator is a volume indicator that can help traders discern if the price movement is verified by changes in trading volume. When there are discrepancies, it can mean that prices are exhibiting overbought or oversold conditions.
Before the Chaikin Oscillator, On-Balance Volume was the most popular indicator for the job. On-balance volume takes an all-or-none approach to its logic, however, and analytical traders yearned for a more nuanced approach.
Enter Marc Chaikin, who discovered an oscillator that would give analysts a more sensitive tool for volume and momentum metrics. The formula only permits certain amounts of volume to be weighted for importance based on the breadth and depth of the trading and prices during the day. Interestingly, it does so by applying the formula for the MACD to the Accumulation/Distribution Line.
Technical analysis using indicators like the accumulation/distribution line is more popular than ever, but it’s important to remember that no single indicator works well for all securities. Technology allows us to not only see and share trading information more quickly than ever before, but to automate trades using a disciplined technical strategy we define. Artificial intelligence tools from Tickeron can aid traders with trade ideas, help analyze signals to execute advantageous trades, and assist investors with making rational, emotionless, and effective trading decisions.