Accumulation Distribution Index (ADI) Indicator Explained: A Step-by-Step Guide to Mastery

Introduction to Accumulation Distribution Index (ADI):

The Accumulation Distribution Index (ADI), originally known as the Cumulative Money Flow Line, is a single-line indicator that assesses money flow in and out of a security. Developed by Marc Chaikin, ADI falls under volume-based oscillators, aiding traders in understanding buying and selling pressure. By incorporating price and trading volume, ADI quantifies these pressures, facilitating the identification of trends and reversals. It calculates cumulative fund flow, detects price-volume divergences, and signals potential shifts early.

Calculation of the Accumulation Distribution Index – The Formula:

Calculation of the Accumulation Distribution Index (ADI) is as follows:

Money Flow Multiplier (MF Multiplier) = [(Close – Low) – (High – Close)] / (High – Low)
Money Flow Volume (MF Volume) = MF Multiplier x Volume
Accumulation Distribution Line (ADL) = Previous ADL + MF Volume
Accumulation Distribution Index (ADI) = Moving Average of ADL

Where,

Close – current closing price.
High – current high.
Low – current low.
Volume – trading volume of the current period
Previous ADL – ADL value of the previous period

For a more stable and interpretable indicator, ADI values are usually smoothed with a moving average.

Now let us take a look at example –

Close : $68
High : $72
Low : $65
Volume: 150,000

Money Flow Multiplier (MF Multiplier): [(Close – Low) – (High – Close)] / (High – Low) = [($68 – $65) – ($72 – $68)] / ($72 – $65) = ($3 – $4) / $7 = -$1 / $7 ≈ -0.1429
Money Flow Volume (MF Volume): MF Multiplier x Volume ≈ -0.1429 * 150,000 ≈ -21,428.57
Accumulation Distribution Line (ADL): ADL = Previous ADL + MF Volume ≈ 120,000 – 21,428.57 ≈ 98,571.43 (Let’s assume the previous ADL value is 120,000)
Calculate Accumulation Distribution Index (ADI): Let’s take the simple moving average of 3 periods. Let’s assume the ADL values over the past 3 periods were: 95,000, 105,000, and 98,571.43. ADI = (95,000 + 105,000 + 98,571.43) / 3 ≈ 99,857.14

Interpreting the Accumulation Distribution Index (ADI):

Interpreting the Accumulation Distribution Index (ADI) involves analyzing cumulative money flow patterns to uncover market sentiment and potential price movements. The ADI combines volume and price data to reveal buying and selling pressures. A solid positive multiplier with high volume indicates robust buying, while a significant negative value with elevated volume suggests intense selling. The ADI’s cumulative line either reinforces or questions the current price trend. This duality helps validate or question trend sustainability.

Notably, divergences between price trends and the ADI offer insights: an upward price trend coupled with a falling ADI may indicate selling pressure and an upcoming bearish reversal. In contrast, a downward price trend alongside a rising ADI could imply growing buying pressure and a potential bullish turnaround. Deciphering these connections empowers traders to anticipate market shifts and make well-informed choices.

Using Accumulation Distribution Index (ADI) with Tradingview:

Goto Indicators, then search for “Accumulation/Distribution” Click on the name of indicator to insert it into chart

Conclusion:

In summary, the Accumulation Distribution Index (ADI) serves as a dynamic tool in technical analysis, blending volume and price data to gauge market sentiment. Its cumulative representation offers a visual insight into buying and selling pressures, which either confirm or challenge prevailing price trends. Through divergence analysis, the ADI aids traders in anticipating potential reversals.