Trading with Accumulation / Distribution (A/D) Indicator - Steemit Crypto Academy / S4W5- Homework Post for Professor @allbert
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Explain in your own words what the A/D Indicator is and how and why it relates to volume.
At some point in the market, the price of an asset is seen to rise steadily and another time, the price keeps dropping. These two situations describe the market cycle the asset goes through: i. the accumulation cycle; where the asset is being held by market participants pushing the price up and ii. the distribution cycle: where market participants begin to sell off the asset causing price to drop.
The A/D indicator is a cumulative indicator that measure using the volume and price of an asset to determine what phase an asset is in, either the accumulation phase or the distribution phase.
In an accumulation phase, price of the asset should be rising and there should be a corresponding rising in the A/D indicator too. This is to mean that, huge volumes of the underlying asset is being bought and held by market participants forcing the price to go up. This follows the simple demand and supply phenomenon, when there is increasing demand, price goes up.
The distribution phase is when the price of the asset falls and there is a corresponding fall in the A/D indicator too. Here, huge volumes of the asset is being sold off forcing the price to fall because there is an increasing supply in the market.
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However, the A/D indicator is also used to find divergence between stock price and volume flow. This gives you an idea of how strong a trend is. For example, if the price is rising but the indicator is declining, it means that buying or accumulation volume is insufficient to sustain the price rise, and a price decline is likely.
Through some platforms, show the process of how to place the A/D Indicator
Using TradingView I will demonstrate how to add the A/D indicator to a chart.
Tap on Chart on the homepage to launch chart
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Select your preferred cryptocurrency
To add the A/D indicator tap on Indicators, denoted fx.
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Use the search bar and enter 'accumulation'. Quickly the A/D indicator is suggested
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Click on Accumulation/Distribution to add the indicator to your chart.
The indicator is added to your chart as seen below
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You can make configurations to the indicator to suit you using the Settings option here.
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Explain through an example the formula of the A/D Indicator.
The formula for A/D indicator = Previous A/D + [Money Flow Multiplier(MFM) * Money Flow Volume (MFV)]
To find MFM, = [(Closing price - Low price) - (High price - Closing price)] / (High price - Low price)
To find MFV, = MFM × Volume of the period
Now lets get practical
This is AXS/USDT chart.
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From the chart above,
Closing price = 123.97
High price = 139.40
Low price = 120.11
MFM = [(Closing price - Low price) - (High price - Closing price)] / (High price - Low price)
= [(123.97 - 120.11) - (139.40 - 123.97)] / (139.40 - 120.11)
= (3.86-15.43) / 19.29
= -11.57 / 19.29
= -0.6
MFV = MFM * Volume of the period
Volume of the period = 3.101M
MFV = - 0.6 * 3.101
= -1.86M
A/D = Previous A/D + (MFM*MFV)
= 9.657 + -0.6 * -1.86
= 10.77M
How is it possible to detect and confirm a trend through the A/D indicator?
One benefit of the A/D indicator is that, it helps traders to spot and confirm trends seen in the chart. I will explain how the A/D indicator can help spot and confirm both a bullish and bearish trend with charts from TradingView.
Bullish Trend
There is a bullish trend when the asset's price is increasing with higher highs and higher low and the A/D indicator should be increasing or move in the same direction as well. This means that market participants are buying and holding large quantities of the underlying asset, causing the price to rise.
See screenshot below
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Bearish Trend
There is a bearish or downtrend when the price in the chart steadily declines recording lower lows and the A/D indicator should have a corresponding decline. Here, huge volumes of the asset is being sold off forcing the price to fall because there is an increasing supply in the market.
See screenshot below
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Through a DEMO account, perform one trading operation (BUY or SELL) using the A/D Indicator only
I will do this part of the work via TradingView.
The crypto pair I used for this trade is SOL/USDT in a 2hr chart. I identified a bullish divergence where in the price chart, price was seen to be dropping with higher lows but on the A/D indicator that wasn't the case.
See screenshot below
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After drawing a trend line and waiting for price to break this line, I place my buy order.
I place my buy order and set stop loss a little below the lowest point in the downtrend and take profit using the same ratio.
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At the time of preparing this work, this was how my trade was doing.
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What other indicator can be used in conjunction with the A/D Indicator. Justify, explain and test.
Like it has always been said, for better results, it is prudent to use more than one indicator for your analysis before entering trade. It is same with the A/D indicator because of the lapses the indicator has. I will be complementing the A/D indicator with the Relative Strength Index (RSI) indicator.
The magnitude of a stock's recent gains is compared to the magnitude of a stock's recent losses to compute the RSI. The RSI scale ranges from 0 to 100. Its primary purpose, is to highlight overbought and oversold conditions. The RSI indictor can be used to spot extreme market conditions like if the asset have been overbought or oversold which the A/D indicator can identify.
Here, I will perform a sell trade using the A/D indicator complemented with the RSI indicator. The crypto pair is ETH/USDT in a 15 minute chart.
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From the chart, you see an uptrend in the price chart but when you look at the A/D indicator it does not look so and this is a bearish divergence which signals a sell trade. But before that, on our complementary indicator, the RSI indicator, we see the line trending downwards confirming the bearish divergence.
I then place a sell order and set my take profit and stop loss as seen below.
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Conclusion
The A/D indicator in my opinion is a very important indicator if when complemented with some other technical tools and indicator will give reliable information to traders to guide their trading decisions. It is an indicator that can help identify and confirm trends and when there is a divergence, it gives early signals of trend reversals.
Thanks to @allbert for yet another insightful lecture.
Regards