Definition
Accumulation Distribution Indicator or ADL (Accumulation Distribution Line) is a volume based indicator which was essentially designed to measure underlying supply and demand. It accomplishes this by trying to determine whether traders are actually accumulating (buying) or distributing (selling). This is accomplished by plotting a running total of each period’s Money Flow Volume. ADL can reveal divergences between volume flow and actual price to primarily either affirm a current trend or to anticipate a future reversal.
History
The Accumulation Distribution Line was created by famed stock analyst Marc Chaikin. The ADL has become closely related to two of Chaikin’s other famous indicators; the Chaikin Oscillator and the Chaikin Money Flow indicator.
Calculation
Accumulation/Distribution = ((Close – Low) – (High – Close)) / (High – Low) * Period Volume
In order to fully understand how the indicator actually works, it is necessary to break this formula down into individual parts.
- Find the Money Flow Multiplier.
((Close - Low) - (High - Close))/(High - Low) = Money Flow Multiplier
- Once you have calculated the Money Flow Multiplier, you can calculate Money Flow Volume.
Money Flow Multiplier * Period’s Volume = Money Flow Volume
- As previously mentioned The ADL is a running total of each period’s Money Flow Volume. Therefore once you have the Current Money Flow Volume you can plot the ADL.
ADL = Previous ADL + Current Money Flow Volume
The basics
When breaking down the formula, what ultimately causes the ADL to rise or fall is the Money Flow Multiplier. The Money Flow Multiplier is determined by the relationship between a period’s closing price and the period’s high/low range. The Money Flow Multiplier is always within a range of 1 and -1. When a period closes in the upper half of the high/low range, the Money Flow Multiplier will rise closer to 1. On the other hand, when a period closes in the lower half of the high/low range, the Money Flow Multiplier will fall towards -1. The closer the multiplier is to 1, the higher the buying pressure. So when you combine a highly positive multiplier with strong volume the ADL will rise. When you combine a highly negative multiplier with strong volume, selling pressure will rise and the ADL will fall. Therefore ADL can be seen as a way of measuring the strength of buying and selling (accumulation and distribution) pressure. With this in mind, ADL becomes a valuable tool in both confirming trends as well as anticipating reversal.
What to look for
Trend Confirmation
This is actually the simplest benefit of using the ADL. During a strong uptrend or a strong downtrend, The ADL will actually move in the same direction as price confirming the current trend.
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