Several studies comprise information-based analysis provided by volume because in most cases, volume precedes prices.
It’s not uncommon for the volume of a crypto asset's data to increase immediately before or at the start of a bullish movement.
The Accumulation/Distribution line has been developed to measure the money flowing in or out of crypto.
The main idea is to create a mechanism that helps to detect the occurrence of reversals in the current market trend, through price and volume relationships.
Understanding the Accumulation/Distribution line
It’s difficult to talk about volume-based indicators without mentioning OBV as a reference, and that is exactly what we will do here. Briefly recapping, we can see the variation of the closing values between the current and the previous intervals in the OBV to decide whether the volume will be added or subtracted.
This way, a positive variation between closings will result in an indicator’s value increase while a negative closing will result in a decrease.
Therefore, in the OBV, it doesn’t matter if the price opened at the interval’s minimum and closed at the maximum, if this maximum is inferior to the previous interval’s closing, we will still have a negative day.
Accumulation/Distribution uses a different approach. It focuses on the events of the current interval, that is, on the price closing’s position in the gap between the minimum and the maximum of the current candle. We attribute the name closing point (CP) to this value. The closing point is thus the central element of the Accumulation/Distribution line calculation, indicating in which relative part of the candle occurred the closing. The CP varies between +1 and -1 and there are two main scenarios:
- Closing in the candle’s upper half: CP between 0 and 1.
- Closing in the candle’s lower half: CP between 0 and -1.
Naturally, the middle and the minimum would result in a CP of +1, 0 and -1 respectively. After this calculation, the CP is multiplied by volume and the result is added to the aggregated general of the indicator.
Interpreting and adding
The Accumulation/Distribution indicator is available in the Basic, Standard, and Pro versions of Vector and it can be added to your chart through the following steps: right-click the chart, select “Add Indicator” and type “Accumulation/Distribution”.
The main use of the Accumulation/Distribution Line is for divergence analysis. Generally, it is known that:
- Bullish divergence: prices make consecutive lower funds, but the indicator doesn’t keep up and produces an upward slope.
- Bearish divergence: prices make consecutive higher tops, but the indicator doesn’t keep up and produces a downward slope.
The Accumulation/Distribution line focuses on the greater current interval than other volume-based indicators.
The indicator contributes to capital flow monitoring and its movements serve to both confirming tendencies and giving a warning sign for a potential reversal.
Accumulation/Distribution should be used in a technical context in which there are complementary analytical tools such as price pattern studies and momentum-type oscillators.
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