Accumulation/Distribution Indices Technical Analysis and Accumulation/Distribution Indices Trading Signals

Developed by Marc Chaikin

This indicator is used to assess the cumulative flow of money into and out of indices.

Originally used for stocks trading, when it comes to stocks trading “volume” is the amount of shares traded in a particular stock, this volume is a direct reflection of the money that is coming into and out of a stock.

The basic principle behind AD is that volume(or money flow) is a leading indicator of the indices price. (Volume precedes indices price).

Tick volume is the measure of stock indexes price changes (ticks) received by a indices broker during a particular trading period/interval. The tick volume is incorporated by many indices brokers in their charting software.

Interpretation

This volume indicator is used to determine if volume is increasing or decreasing as the stock indexes price on a stock indices chart is rising or falling.

Uptrend

If the stock indexes price on a stock indices chart is rising then the Accumulation/Distribution should also be rising. This shows that the stock indexes price move is being supported by volumes and the move upwards has strength and is sustainable.

If on the other hand stock indexes price is moving up and the volumes are not, the strength behind the move is reducing; this creates divergence between stock indexes price and indicator and warns of a possible move in the opposite direction.

Downtrend

If the stock indexes price on a stock indices chart is falling then the AD should also be falling. This shows that the stock indexes price move is being supported by volumes and the move downwards has strength behind it.

If on the other hand stock indexes price is moving down and the volumes are not, the strength behind the move is reducing; this creates divergence between stock indexes price and AD and warns of a possible move in the opposite direction.

Indices Technical Analysis and Generating Indices Trading Signals

Below is an example of a stock indices chart and the technical analysis explanation

From the chart above we can separate the chart into three parts, part A, B and C.

A - Upward indices trend line on chart as well as on the Accumulation/Distribution

B - Downward indices trend line on chart as well as on the Accumulation/Distribution

C - Upward indices trend line on chart as well as on the Accumulation/Distribution

As long as the stock indexes price and the indicator are moving in the same direction then the stock indexes price move has enough momentum to continue moving in that direction as shown above

Indices Trend Line Break

From the above chart we can see that once the indices trend line on the AD was broken then the stock indexes price indices trend line was also broken.

Looking at the chart below we have added vertical lines to represent the points where the indices trend lines were broken, both on the stock indexes price chart and the indicator.

Comparing the indices trend lines on the indicator and the stock indexes price those of the AD were broken before those of the chart. This is because volume always precedes indices price.

Trading signals

Exit

Exit signals are generated when the indices trend line on the Accumulation/Distribution is broken. A indices trend line break on the indicator warns of a possible reversal.

Entry

Once the indices trend line on the AD is broken it warns of a possible reversal in the direction of the stock indexes trading market.

However if we want to take a trade in the opposite direction it is always best to wait for a confirmation signal.

A confirmation signal is considered complete once both the indicator and the stock indexes price breaks both their indices trend lines.

Entry Signal Generated by Indices Trend Reversal