Accumulation Distribution Technical Analysis Trading Signals
Developed and Created by Marc Chaikin
This indicator is used to assess the cumulative flow of money into & out of a currency pair.
Originally used for stock trading, when it comes to stock "volume" is the number and amount of stocks traded and transacted for a given stock, this volume is a direct reflection of the money that's coming into and out of a stock.
The basic principle behind AD is that volume(or money flow) is a leading technical technical indicator of the market price. (Volume precedes price).
In the market-Forex, there's no central exchange for trades as compared to stocks trades where there a central exchange for stocks, for example the NYSE - New York Stocks Exchange.
Since there is no true measure of volume (actual money) that's flowing into and out of a currency market, brokers have come up with a substitute for actual money volume, this substitute is known as "tick volume".
Tick volume is the measure of price changes (ticks) received by a broker during a given period/interval. Tick volume is incorporated by a lot of brokers in their charting software platform.
Interpretation
This volume indicator is used to figure out if volume is increasing or decreasing as the price of a forex pair is rising or falling.
UpTrend
If price of a currency pair is moving upward then the Accumulation/Distribution should also be moving upward. This portrays price move is being supported by volumes and the move upwards has strength and is sustainable.
If on the other hand price is heading up & the volumes are not, the strength behind the move is reducing and waning: this creates a divergence setup between price and indicator & warns of a possible move in the opposite market direction.
DownTrend
If price of a currency pair is moving downward then the AD should also be moving downward. This portrays that the price move is being supported by volumes & the move downwards has power behind it.
If on the other hand price is heading down & the volumes are not, the strength behind the move is reducing and waning: this creates a divergence setup between price and AD and warns of a possible move in the opposite trend direction.
FX Analysis and How to Generate Trading Signals
Illustrated Below is example illustration of a chart & the analysis explanation
From chart above we can separate the trading chart in to 3 parts, part A, B and C.
A - Upward trendline on chart & also on the Accumulation Distribution
B - Downwards trendline on chart & also on the Accumulation/Distribution
C - Upward trendline on chart & also on the Accumulation/Distribution
As long as the price and the indicator are heading in the same direction then price move has enough momentum to continue heading in that specific direction such as shown above
Trend Line Break
From the above chart we can see that once the trend line on the AD indicator was broken then the price trend-line was also broken.
Looking at the trading chart below we have added vertical lines to represent the points where the trend lines were broken, both on price chart & the technical indicator.
Comparing the trend lines on the indicator and the price those of the AD indicator were broken before those of the chart. This is because volumes always precedes the price.
Signals
Exit
Exit signals are derived & generated when the trend line on the Accumulation Distribution indicator is broken. A trend-line break on the indicator warns of a possible reversal.
Entry
Once the trend line on the AD is broken it warns of a possible reversal in the direction of the market.
However if we want to take a trade transaction in the opposite trend market direction it is always best to wait and chill for a confirmation signal.
A confirmation signal is considered complete once both the indicator and the price breaks both their trendlines.
Entry Trading Signal Derived/Generated by Trend Reversal
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