Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part VIII the focus will be on The Accumulation/Distribution Indicator (A/D).
The Accumulation/Distribution Indicator (A/D)
The accumulation/distribution indicator is an indicator which makes use of volume and price to asses if an asset in in accumulation or distribution phase. It identifies any divergences that exist between an assets price and the volume flow of said asset. This is to provide an insight into the strength of the trend an asset is currently in. Simply put, when the price of an asset is rising but the indicator, which is a line indicator, is falling then the underlying theory is that buying or accumulation of the asset may not be enough to support the rising price, meaning one should expect an incoming price decline.
As the A/D indicator is a cumulative indicator, it is calculated by adding or subtracting one period's value from the previous one. This is shown on a line which gauges the supply and demand of an asset and takes into account where the price closed within the specified period of time. It then multiplies it by the assets volume. Key rules for using an A/D indicator is to assume a rising line can help to confirm a rising trend in an assets price, while a falling line should help to confirm a falling trend in an assets price.
Calculating an A/D Indicator
To calculate the A/D Indicator a trader needs to follow three steps. The first is to calculate the Money Flow Multiplier (MFM), the second is the Money Flow Volume (MFV), and finally the third step is to create the running total of the MFV which forms the Accumulation Distribution Line (ADL).
1. MFM = [(Close Price - Low Price) - (High Price - Close Price)] divided by (High Price - Low Price)
2. MFV = MFM x Volume for set Period
3. ADL = Previous ADL + Current Period MFV
This process is then repeated every time a period ends, adding or subtracting the new MFV from the prior total. This will then form the chart of the Accumulation / Distribution Line Indicator.
How to use an A/D Indicator
The A/D indicator is shown as a line graph consisting of one line, the Accumulation / Distribution Line. It is used to show the supply and demand of an asset, and can move in the same direction or opposite direction of the price. The line graph is used as a gauge for the strength of the buying or selling during a particular period of time. Therefore when an assets closing price near to the high of the specified periods price range, along with a high volume, the result is a large jump upwards in the A/D. Similarly, when the price of an asset closes near the bottom of its price range, coupled with a high volume, a large shift downwards is shown on the A/D. When an asset has a price closing near the upper end of its price range but has a low volume, or if the volume is high but the price closes near the middle of its range, generally there will be little in terms of movement on the A/D, and the same applies when the price is at the lower end of its range.
The A/D is therefore used to help assess when a price will have a reversal from its current trend. When an asset is in a downtrend but the A/D line is showing an uptrend, it can be used as an indicator that there could be buying pressure and a reversal in price and trend is about to take place. At the same time when a price of an asset is in a downtrend but the A/D line is in an uptrend, it can be used as an indicator that there is high selling pressure and a price reversal could be about to happen. In both of these cases, the steepness of the A/D can be a strong insight into the trend. A strong rising A/D line confirms a strong rise in price, while a sharp fall in the A/D line confirms a likely continue of a falling price in an asset.
Below is an example of the 1hour BTC/USDT chart from Binance, showing the candlestick chart along with the A/D line chart. The EMA 200 line has been shown in yellow to help give an indication of the trend, which was downwards as the price on the candlestick chart was below the line. I also drew a white horizontal line on the A/D chart to show where the highest point of the A/D line was when the price was at its highest point. This can help to be an indication of where to A/D line is going, especially when the price is in a range.
The area highlighted in white shows where a steep decline in the A/D line took place, along with sharp drop in price. This was a strong indicator of a bearish trend, and led to further falling in price action.
The area highlighted in blue shows where the price increased, but there was only a minimal increase in the A/D line, which predominantly continued in a downwards fashion. This was an indication that the sharp increase in price was only a minor movement and not an indication of a change in the overall trend.
Limitations of an A/D Indicator
While the A/D indicator can be a good sign of trend strength in an asset, it does not include price changes from one period to another. Its focus is primarily on where the price closes within a specified period and this can lead to anomalies in the indicator. An example of this would be taking a daily period and seeing an asset drop more than 20% during the trading day. When the asset closes however, it has risen and is down 15%. This would cause the A/D indicator to rise, as the asset finished its trading period in the upper portion of its daily range. This can cause the indicator to increase, potentially dramatically, due to larger volumes at the end of its trading period. This means traders need to pay attention to the price chart and be weary of any potential anomalies which could affect the indicator.
Another drawback is that the indicator is used to look for divergences, but divergences can last for an extended period of time and are often poor for timing signals. A divergence between the price and the indicator does not mean an imminent reversal is about to take place, as it could take time for the price reversal to take place, or perhaps not at all. Due to this, traders should use the A/D indicator along with other analysis, such as price action and chart patterns, to give themselves a more complete picture of the moving price of an asset.
Conclusion on using an A/D for TA
As a trader, whether it be day trading or long term trading, using the A/D indicator can be very beneficial in spotting the underlying strength or weakness of a tend, while also indicating any potential upcoming changes to the trend. The A/D indicator makes use of a cumulative measure of a specific periods volume flow, meaning a high positive combined with high volumes indicates strong buying pressure, which pushes the indicator higher. At the same time, a low number combined with high volumes indicates strong selling pressure which pushes the indicator lower. It can be used to spot divergences when the price action is going in one direction and the A/D indicator is trending in the opposite, indicating a reversal may be about to take place. The indicator cannot give a timeframe for when a reversal may happen, and can also give false divergences due to a large range of price action within the specified period. Therefore the A/D indicator should not be used as a standalone indicator, instead it should be used in conjunction with other indicators to give stronger results and more reliable signals.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to get caught into false signals with large price actions and the A/D indicator showing an upcoming trend reversal which never takes place. Another factor to consider is that divergences can last for a significant period of time and any impending price reversal can take time to happen.
It is important to use the Accumulation / Distribution indicator along with other TA to get the correct signals for understanding the strength of a trend. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall trend strength via the A/D Indicator, along with checking the trend strength of the larger overall trend compared to short term ones.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on the The Supertrend Indicator. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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