Business, Legal & Accounting Glossary
The Accumulation Distribution Line (ADL), also known as Volume Accumulation Distribution Line, is a momentum indicator developed by Marc Chaikin. The Accumulation Distribution Line attempts to gauge supply and demand by calculating whether the stock is being accumulated (bought) or distributed (sold). The indicator is based on the assumption that the higher the volume that accompanies a price move, the more significant the price move.
When the Accumulation Distribution Line moves up, most of the trade volume is associated with upward price movement, thus indicating that the security is being accumulated. Conversely, when the Accumulation Distribution Line decreases in value, most of the trade volume is associated with downward price movement, showing that the security is being distributed.
The ADL is calculated by adding or subtracting a portion of each day’s volume from a cumulative total. The nearer the closing price is to the high for the day, the more volume is added to the cumulative total. The nearer the closing price is to the low for the day, the more volume subtracted from the cumulative total. If the close is exactly between the high and low prices, nothing is added to the cumulative total.
The ADL is often used in chart studies as a leading indicator of stock price movement. The indicator is drawn below the price chart with the same time axis. When a divergence occurs between the Accumulation Distribution Line and stock price, there is usually a change in the direction of the stock price, confirming the Accumulation or Distribution. For example, if the indicator is moving down as shown in the graph below and the security’s price is going up, the stock price will probably start moving downward.
A divergence between stock price and Accumulation Distribution Line often signifies a change in stock price direction.
The ADL may also be used as a confirming indicator. When the indicator is in sync with the stock price then the indicator provides the chartist with confidence that the stock price trend will be maintained.
There are times when the Accumulation Distribution Line doesn’t work as expected. The problem lies with the fact that the indicator does not take into account prices changes from period to period, especially overnight gaps. As such, there can be a substantial disconnect between the stock price and the ADL that can take a period of time to correct. Therefore, the ADL cannot be expected to consistently predict price reversals or confirm price trends in isolation. This is why chartists use the Accumulation Distribution Line in conjunction with other indicators.
A similar but more popular indicator, On Balance Volume (OBV), was developed by Joe Granville. Both indicators (ADL and OBV) are based on the cumulative volume that attempts to confirm changes in prices by comparing the volume associated with prices.
The Chaikin Oscillator is based on the Accumulation/Distribution Line. The Accumulation/Distribution indicator should not be confused with Williams Accumulation/Distribution indicator which is based on price action only.
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This glossary post was last updated: 25th March, 2020 | 13 Views.