The Accumulation / Distribution (A / D) Indicator was developed by Larry Williams in 1972 as an indicator of market power leading to stock trading but can also be applied to futures, forex and other securities.
Accumulation / Distribution (A / D) is an increase and modification of the On Balance Volume (OBV) indicator because it takes into account price and volume. However, a relationship between open price and closing price is required, and price range is considered and not just closing price. For A / D volume is considered bullish when closing price is higher than open and bearish if close price is lower than open. However, the amount of volume assigned to an indicator depends on the distance between the open price and the close price, and the distance between the high and low levels, or the range (range) of the price.
Accumulation / Distribution (A / D) is calculated in two stages. First, the difference between close and open prices is calculated and divided by the difference between the high and low levels of the price range. The result is then multiplied by volume.
The formula is:
A / D = (Close – Open) / ((High – Low) x Volume)
Like the OBV, A / D line direction indicates buying or selling power with A / D increment may indicate increased demand for underlying pair, while A / D decrease may indicate decreasing demand for underlying pair. If A / D moves up it is expected that the underlying pair price will rally up and when A / D move down it is expected that the underlying pair price will decrease. However, when this price continues to rally while the A / D decreases or the price continues to fall as A / D increases then there is a divergence between A / D and price. This is a key signal given A / D and indicates that a price reversal may occur.