What the Accumulation/Distribution Index Can Tell a Day Trader
The accumulation/distribution index is a commonly used indicator of money flow in the stock, bond, and commodities markets. Money flows tell day traders how much money is moving in and out of a securities market. Money flow indicators combine features of price and volume indicators to help traders gauge the market.
In trading terms, accumulation is controlled buying, and distribution is controlled selling. This kind of buying and selling doesn’t lead to big changes in securities prices, usually because the action was planned. No one accumulates or distributes a security in a state of panic.
But even if the buying and selling activity isn’t driven by madcap rushes in and out of positions, it’s still important to know whether, on balance, the buyers or the sellers have the slight predominance in the market, because that may affect the direction of prices in the near future.
For example, if a security has been in an upward trend but more and more down days occur with increasing volume, the sellers are starting to dominate the trading, and the price trend is likely to go down.
To determine the accumulation/distribution index, you use this equation:
Some traders look at accumulation/distribution from day to day, whereas others prefer to look at it for a week or even a month’s worth of trading. There’s no right answer; it depends on what you trade and how you trade it.