The Accumulation Distribution Line is a volume-based indicator developed by Marc Chaikin, designed to measure the cumulative flow of money into and out of a security.
Chaikin originally called the indicator the Cumulative Money Flow Line. much like cumulative indicators, the Accumulation Distribution Line is a running total of each period's Money Flow Volume.
First, a multiplier is calculated based on the relationship of the close to the high-low range.
Second, the Money Flow Multiplier is multiplied by the period's volume to come up with a Money Flow Volume.
A running total of the Money Flow Volume forms the Accumulation Distribution Line.
Traders can use this indicator to confirm an up or down trend or to anticipate reversals when the indicator diverges from the security price.
The Money Flow Multiplier fluctuates between +1 and -1. It holds the key to the Money Flow Volume and the Accumulation Distribution Line. We deem the multiplier as positive when the close is in the upper half of the high-low range and negative when in the lower half. Buying pressure is stronger than selling pressure when prices close in the upper half of the period's range (and visa versa). The ADL rises when the multiplier is positive and falls when the multiplier is negative.
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The Accumulation Distribution is calculated using the following formula:
Money Flow Multiplier = [(Close - Low) - (High - Close)] /(High - Low)
Money Flow Volume = Money Flow Multiplier x Volume for the Period
ADL (Accumulation Distribution Line) = Previous ADL + Current Period's Money Flow Volume
The multiplier adjusts the amount of volume that ends up in the Money Flow Volume. Volume is reduced unless the Money Flow Multiplier is at its extremes of + or - 1. The multiplier is +1 when the close is on the high and -1 when the close is on the low. All volume is positive when +1 and all volume is negative when -1. At .50, only half of the volume translates into the period's Money Flow Volume.
In theory, any up days occurring with high volume in a downtrend could signal that the demand for the underlying is starting to increase. In practice, the ADL is used to find situations in which the indicator is heading in the opposite direction the price is moving in. When the divergence has been identified, you should wait to confirm the reversal and make your transaction decisions using other technical indicators. Never base a buy, sell or hold on only one indicator.
As with all other indicators, don't just rely on the defaults, adjust your indicators to suit the stock you are looking at and your trading style.
Typically shorter look backs (lower #'s on your indicators) give you quicker signals which is good for aggressive traders, while longer look backs (higher #'s on your indicators) give slower but more reliable signals for traders who are more conservative.
As we always say: "Don't use your hard earned cash to find out what kind of trader you are, use a virtual account for that."
Links for free virtual trading sites can be found on our Resources page: