Accumulation Distribution Technical Analysis Signals
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 stocks "volume" is the amount of shares traded in a particular stock, this volume is a direct reflection of the money that's coming into & out of a stock.
The basic principle behind AD is that volume(or money flow) is a leading indicator of the 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 no true measure of volume (actual money) that's flowing into & out of a currency market, brokers have come up with a substitute for the 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 particular period/interval. Tick volume is incorporated by many brokers in their charting software.
Interpretation
This volume indicator is used to determine if volume is increasing or decreasing as the price of a currency pair is rising or falling.
UpTrend
If the price of a currency pair is rising then the Accumulation/Distribution should also be rising. This portrays that the price move is being supported by volumes and the move upwards has strength and is sustainable.
If on the other hand price is moving up and the volumes are not, the strength behind the move is reducing: this creates a divergence setup between price and indicator & warns of a possible move in opposite direction.
DownTrend
If the price of a currency pair is falling then the AD should also be falling. This portrays that the price move is being supported by volumes and the move downwards has strength behind it.
If on the other hand price is moving down and the volumes are not, the strength behind the move is reducing: this creates a divergence setup between price and AD and warns of a possible move in opposite direction.
FX Analysis and How to Generate Signals
Illustrated Below is example of a chart and the analysis explanation
From chart above we can separate the chart into 3 parts, part A, B and C.
A - Upward trend-line on chart as well as on the Accumulation Distribution
B - Downward trend-line on chart as well as on the Accumulation Distribution
C - Upward trend-line on chart as well as on the Accumulation Distribution
As long as the price & the indicator are moving in the same direction then the price move has enough momentum to continue moving in that direction as shown above
Trend-Line Break
From the above chart we can see that once the trend-line on the AD was broken then the price trend-line was also broken.
Looking at the chart below we have added vertical lines to represent the points where the trend-lines were broken, both on the price chart and the indicator.
Comparing the trend lines on the indicator & the price those of the AD were broken before those of the chart. This is because volume always precedes price.
Signals
Exit
Exit signals are generated when the trend-line on the Accumulation/Distribution 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 in the opposite direction it is always best to wait for a confirmation signal.
A confirmation signal is considered complete once both the indicator & the price breaks both their trend lines.
Entry Signal Generated by Trend Reversal
