Accumulation-Distribution Line
From Financial Literacy Wiki
Accumulation-Distribution Line (commonly known as A/D Line, not to be mixed up with Advance-Decline Line) is a momentum indicator that attempts to confirm changes in the pricing trend by determining whether investors are generally "accumulating" (buying) or "distributing" (selling) a particular stock by identifying divergences between stock price and volume flow.
It is calculated using the formula below:
Accumulation/Distribution = [(Price Close – Price Low) – (Price High – Price Close)] / (Price High – Price Low) * Period's volume
Looking at the formula, for example, if there are many 'up' days occurring especially with high volume could signal that the demand for the underlying is starting to increase. In practice, the Accumulation-Distribution Line indicator is used to find situations in which the indicator is heading in the opposite direction as the price, commonly known as divergence. For example, if you see that the price is trending upwards, but the Accumulation/Distribution Line is trending downwards or vice versa.
Once this divergence has been identified, the trader will have to wait to confirm the reversal through other technical indicators and change the trading strategies accordingly.
