Today you will get to know the tool that is known as Accumulation Distribution indicator. It was designed by Marc Chaikin and was initially called the Cumulative Money Flow Line. Traders use indicators to recognise the trend or the change in the price direction and so find the best points to open transactions.
What is Accumulation Distribution indicator?
The Accumulation Distribution Line is calculated by adding the current period's Money Flow Volume to the previous Accumulation Distribution Line. And the Money Flow Volume is Money Flow Multiplier multiplied by the Volume for the period.
The Accumulation/Distribution technical indicator is the accumulative measurement of volume flows in each period. Its line is rising when the buying pressure is high that is when a high positive multiplier is joined with high volume. A strong selling pressure, (low negative multiplier and high volume), results in the decrease of the indicator's line. Money Flow Volume creates a line that can confirm or contradict the trend seen on the price chart.
Adding the Accumulation Distribution indicator to the IQ Option chart
To add an indicator to the trading chart, you must be logged in to your IQ Option account. Decide what kind of asset you are going to trade in this session. Set the timeframe for your chart. Now, click on the Indicators icon. There are a few categories under the Indicators tab. Choose ‘Volume'. Then you will see the Accumulation Distribution on the list on the left side. Click on it and it will be opened in the separate window beneath the price chart.
Trading with the Accumulation Distribution indicator on IQ Option
You can use the AD in a few ways. You just have to observe the price chart together with the indicator's window.
Trend confirmation with Accumulation Distribution indicator
You get a confirmation of the trend that is seen on the price chart when both, the price and the Accumulation Distribution line go in the same direction. If they rise, there is an uptrend. The downtrend exists when both move downwards.
Bullish and bearish divergences
Divergences happen when the price and the indicator do not go in the same direction. They help to catch the upcoming trend reversal.
Below, there is an exemplary chart with bullish divergence. The price is falling but at the same time, the Accumulation Distribution indicator is rising. Underlying buying pressure (accumulation) forces the price to change direction.
When the price is going up but the indicator's line is falling, we can assume there is underlying selling pressure (distribution) and expect the reversal of the trend.
The AD indicator is great for assessing the strength of the volume behind a given price movement on a chart. It gives a good indication of the selling and buying pressure in a given market. This allows you to estimate potential future price movements. However, it is not recommended to use this indicator alone. It can be combined with other technical analysis indicators. The first one that comes to mind here is the moving average, as they generally work well with oscillators.
The Accumulation Distribution indicator shows a general flow of volume. Its rise reveals buying pressure and its decline in selling pressure. It can be used to confirm the existing trend or to find future trends and catch a potential change in the price direction.
Use it in combination with other technical analysis tools such as chart patterns or momentum oscillators.
Check in the IQ Option demo account how it works. You will get time to know it well without worrying about losing your money.
Wish you successful trading!
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