Technical Analysis

Function & Calculation

Function:

When the Accumulation/Distribution indicator grows, it means there is accumulation (buying) of that currency pair, as the overwhelming share of the trading volume is related to an upward move of price. When the indicator drops, it means distribution (selling) of the currency pair, as most of the trading volume takes place during the downward price movement. In this way, the Accumulation/Distribution indicator gives a direction to volume. The direction of volume should converge with the direction of the current price trend for it to be considered sustainable and “healthy”.

In practice, the Accumulation/Distribution indicator is used to find situations where the indicator is heading in the opposite direction than price. Such a situation, called a divergence, implies that a price reversal may be at hand. As a rule, in case of such divergences, the price tendency moves in the direction in which the indicator moves. The indicator reflects buying and selling “pressure”. Thus, if the indicator is growing, but the price of the security is dropping, a turnaround of price can be expected. Price should eventually succumb to the buying pressure and rise.

A trader needs to keep a close eye for a confirmation of such a reversal and monitor his other technical indicators for trading signals.

Differences in volume between equity and foreign exchange markets:
With reference to stocks, “volume” typically reflects the amount of shares traded in a particular stock and is a direct reflection of the money flowing into and out of the stock. However, it's very important to note that in the foreign exchange (FOREX) market there is no central exchange. Therefore, there can be no true measure of actual money (volume) being trading in a particular currency instrument. Instead the way volume is measured is to count how many ticks or changes of price there are throughout the session. This is referred to as “tick volume”. There needs to be a certain amount of contracts signed to move the price one way or the other, and each tick represents this amount. Therefore volume can still be measured, even though it’s a little bit of a roundabout way compared to equities.

Calculation

• A portion of daily volume is added or subtracted from a cumulative total.
• The indicator does not use the opening price or previous closing price to track price movements. Instead, it uses the midpoint between the high and low prices for the day to determine whether the closing price is significant relative to the remainder of trading for the day.
• More volume is added the nearer the close is to the high for the day, and more subtracted the nearer the close is to the low.
• Nothing is added or subtracted when the close is equidistant between the day's high and low.
• Therefore, the overall price for the day could be decreasing, but the security could be evaluated as being accumulated at the end of the day if the closing price rose above the midpoint between the high and low prices for the day.

Formula

Acc/Dist = [((Close – Low) – (High – Close)) / (High – Low)] * (Period's Volume) The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Please refer to our risk disclosure page for more information.

The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Please refer to our risk disclosure page for more information.