The Accumulation/Distribution Line is a volume indicator, meaning that it's used to measure the amount of money moving in or out of a security. Its common uses include predicting trends and trend reversals.
The Accumulation/Distribution Line illustrates where a security's current closing price stands in relation to that security's high and low prices over a given period of time. When the current close is higher than the close the day before, it's said that volume has accumulated, and when the current close is lower than the day before, volume is said to be distributed. If volume has accumulated, the new Accumulation/Distribution value is added to the previous day's value to create a new data point. If volume has distributed, the new Accumulation/Distribution value is subtracted from the previous day's value to create a data point.
Plotting the Accumulation/Distribution Line over time can provide analysts with clues about how a security's price may move in the future. For example, many analysts consider it a bullish signal when there's strong positive divergence, which means that the indicator is increasing in value while prices are simultaneously declining. Negative divergences occur when the indicator's value decreases while the security's price increases and are believed to be bearish signals.
Volume is a popular technical analysis tool because it's thought to lead price movements by showing general trends of buying or selling. In general, price movements are thought to be more significant when they correspond to high trading volume. For example, a day when a security's price increases is more significant when volume is high than when it is low.
Other price-volume indicators include the Chaikin Money Flow and the Money Flow Index.
The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.