understanding the Accumulation Distribution Line (ADL)

Accumulation Distribution Line (ADL) is a volume-based indicator created to assess the fundamental supply and demand dynamics in the market. It aims to identify whether traders are in a phase of accumulation (buying) or distribution (selling) by calculating a cumulative total of the Money Flow Volume for each period. The ADL can highlight discrepancies between volume movements and actual price trends, helping to confirm an ongoing trend or predict a potential reversal in the future.

History 

The Accumulation Distribution Line (ADL) was developed by renowned stock analyst Marc Chaikin. It is closely associated with two of his other well-known indicators: the Chaikin Oscillator and the Chaikin Money Flow indicator.

Calculation 

The formula for calculating Accumulation/Distribution is as follows: 

Accumulation/Distribution = ((Close – Low) – (High – Close)) / (High – Low)  Period Volume. 

To grasp how this indicator functions, it's essential to break down the formula into its components. 

1. Calculate the Money Flow Multiplier: 

   ((Close - Low) - (High - Close)) / (High - Low) = Money Flow Multiplier. 

2. After determining the Money Flow Multiplier, you can then compute the Money Flow Volume: 

   Money Flow Multiplier  Period’s Volume = Money Flow Volume. 

3. The ADL represents a cumulative total of the Money Flow Volume for each period. Therefore, to chart the ADL, you add the Current Money Flow Volume to the Previous ADL: 

   ADL = Previous ADL + Current Money Flow Volume. 

Basics 

Analyzing the formula, the primary factor influencing the rise or fall of the ADL is the Money Flow Multiplier. This multiplier reflects the relationship between a period's closing price and the high/low range for that period. It typically ranges from -1 to 1. A closing price in the upper half of the range results in a Money Flow Multiplier that approaches 1, while a closing price in the lower half drives it closer to -1. A multiplier closer to 1 indicates greater buying pressure. Thus, when a strongly positive multiplier coincides with high volume, the ADL will increase. Conversely, a highly negative multiplier paired with strong volume will lead to a decrease in the ADL, reflecting selling pressure. Consequently, the ADL serves as a measure of the strength of buying and selling (accumulation and distribution) activities, making it a useful tool for confirming trends and predicting potential reversals.

What to Look For 

Trend Confirmation 

This is one of the most straightforward advantages of using the ADL. In the presence of a robust uptrend or downtrend, the ADL tends to move in tandem with the price, thereby affirming the prevailing trend.

Divergence

Divergences are significant in the analysis of the Accumulation/Distribution Line (ADL). Many traders believe that changes in volume often lead changes in price, so any situation where volume and price are moving in opposite directions should be taken into account. The ADL can assist traders in recognizing these situations. A bullish ADL divergence occurs when the ADL is increasing while the price is decreasing. An upward trend in the ADL indicates growing buying pressure (Accumulation). If we assume that volume leads price, a price reversal appears likely.

Bearish ADL Divergence occurs when the Accumulation Distribution Line (ADL) is declining while the price is increasing. This suggests that selling pressure is building up (Distribution), indicating that the price might soon start to decline.

Unreliability 

Like any indicator, it's crucial for users of the Accumulation/Distribution Line (ADL) to be aware of its limitations. A significant drawback of the ADL is that the Money Flow Multiplier, which significantly influences the direction of the ADL, does not account for price range changes between periods. As a result, if there is a price gap, the ADL will not reflect this, leading to a disconnection between the line and the actual price.

Summary 

In general, the Accumulation Distribution (ADL) indicator is a fairly dependable tool for assessing the underlying dynamics on a security's chart. This task can be challenging, making ADL quite beneficial. However, understanding the underlying buying and selling pressures (accumulation and distribution) is usually insufficient on its own. Therefore, ADL works best as a supplementary indicator, serving as just one component of any trading approach or strategy. Additionally, due to the unreliability noted earlier, ADL should not be used as a standalone tool, as it can sometimes become misaligned with price movements. It is advisable to utilize other tools to establish a system of checks and balances.

Accumulation/Distribution 

Allows you to toggle the visibility of the ADL and a price line that displays the current value of the ADL. You can also customize the ADL's color, line thickness, and visual style (with Line being the default option).

Properties 

Last Value on Price Scale 

Enables or disables the visibility of the Indicator Value on the vertical axis.

Arguments in Header 

Enables or disables the display of the indicator's name and settings in the upper left corner of the chart.

Scaling 

Adjusts the indicator's position to either the Right or the Left.