What is it?
Accumulation/Distribution (A/D) was developed by Larry Williams in 1972 as a leading market strength indicator for trading stocks but it can also be applied to futures and other types of securities. Accumulation/Distribution (A/D) is an enhancement over On Balance Volume (OBV) as it takes price and volume into account. It also takes the relationship between the opening and the close, and the price range into account rather than just the close. For A/D, volume is considered bullish when the price close is higher than the open and bearish when the price close is lower than the open. However, the amount of volume assigned to the indicator is dependent on the distance between the open and the close, and distance between the high and the low, or the price range.
How is it calculated?
Accumulation/Distribution (A/D) is calculated in two steps. First, the difference between the close and the open is calculated and divided by the difference between the high and the low of the price range. The result is then multiplied by the volume. The formula is:
A/D = ( Close – Open ) / ( ( High - Low ) x Volume )
How is it used?
As with the OBV indicator, the direction of the A/D line indicates buying or selling strength with a rising A/D indicating increased demand for the underlying security, while a decline in A/D indicating a decline in the demand for the underlying security. When A/D increases the price of the underlying security is expected to rally and when the A/D decreases the price is expected to drop. However, when this price continues to rally while A/D declines or continues to fall when A/D increases divergence between A/D and the price occurs. This is the key signal that A/D provides and indicates that a price reversal is probable.