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Description and methodology

There are some indicators able to measure changes in the share price and in the trading volume. The most well-known volume-based indicator is the ACC/DIST. Changes in the volume precedes changes in share prices. Trading volume shows how many shares have been traded on the given market. It reflects the price changes directly. Volume- and price-based indicators have been developed to signal the positive and negative changes in the volume before the share price changes. Accumulation is when the closing price of a given period is higher than the average of the maximum and minimum points of the given period. On the contrary, distribution is when the closing price of a given period is lower than the average of the maximum and minimum points of the given period.

The ACC/DIST indicator was developed by Marc Chaikin to determine the overbought and oversold state of markets. To understand its principles, a little volume-based indicator historical overview is necessary. On Balance Volume (OBV) was developed by Joe Granville in 1963 to measure the positive and negative volume changes. OBV is a simple indicator: when share price closes higher than yesterday, the trading volume is added to the average. When share price closes lower than yesterday, the trading volume is subtracted from the average. The OBV consists of these positive and negative trading volume changes. When compared with the share price, there can be divergences and confirmations. Chaikin used a different approach when developing the ACC/DIST indicator. The comparison of OBV closing prices gives the sign (+/-) of the volume. When a share opened at minimum and closed at maximum, the OBV must be negative until the closing price decreases below the first opening price of the period. Chaikin did not want to deal with closing prices. Instead, he dealt with market price movements in the given period (day, week, month). He derived a formula to calculate a value which is based on the situation of the closing price and periodic. The name of the parameter is Close Location Value (CLV). CLV is a value between -1 and +1. H is the daily maximum price, L is the daily minimum price, and C is the daily closing price. Using these variables, the CLV formula is the following:

[latex]CLV=\frac{(C-L)-(H-C)}{H-L}[/latex]

The formula gives a percentage value of the position of the closing price between the minimum and maximum prices. CLV is +1 when the closing price equals the maximum price. CLV is -1 when the closing price equals the minimum price. To sum it up:

  • CLV = +1: when the share closes at the maximum value
  • 0 < CLV < 1: when the share price closes below the maximum price but in the upper half of the price range
  • CLV = 0: when share price closes at the half point of the price range
  • -1 > CLV > 0: when the share price closes above the minimum price but in the lower half of the price range
  • CLV = -1: when the share closes at the minimum value

The calculation of ACC/DIST has two more steps. The CLV values is multiplied by the volume of the related period (day, week). This number is added to the previous ACC/DIST value:

[latex]ACC/DIST=ACC/DIST(previous)+CLV\times Volume[/latex]

The Accumulation/Distribution line is formed this way. It can help to see whether the buyers or the sellers are the more dominant in the given market of the examined share. The trader should look for confirmation or divergence on the chart again.

Deriving the ACC/DIST indicator

Deriving the ACC/DIST indicator

Trading signals

Bullish signal

  • Bullish signal is when the ACC/DIST indicator shows positive divergence. “Young” and weak positive divergences should be treated with caution. The trader should look for a trend on the ACC/DIST indicator. Positive divergence lasting for two weeks may not be a reliable signal. However, positive divergence lasting for several months should call the trader’s attention.
  • The indicator also signals when it confirms the current trend. When the share price increases rapidly and the indicator does not follow the change in the correct pace or the indicator moves sideways, the buyer pressure is probably weakening.
Acc/Dist indicator’s positive divergence

Acc/Dist indicator’s positive divergence

Bearish signal

  • It is the same as the Bullish signal, but the signal is given by a negative divergence. The trader should look for a trend on the ACC/DIST indicator and compare it with share price movements. Negative divergence lasting for two weeks may not be a reliable signal. However, negative divergence lasting for several months should call the trader’s attention.
  • The indicator also signals when it confirms the current trend. When the share price decreases rapidly and the indicator does not follow the change in the correct pace or the indicator moves sideways, the seller pressure is probably weakening.
Acc/Dist indicator’s negative divergence

Acc/Dist indicator’s negative divergence

Use

Some advantages of the ACC/DIST indicator:

  • It is an excellent tool to forecast market movements based on trading volume changes.
  • It helps to recognise when the trading volume increases while share prices are increasing/decreasing.
  • It can be used to recognise simple price changes. An ascending trend indicates when buyers are in majority, an inclining trend indicates when sellers are in majority.
  • Helps to recognise positive and negative divergences.
  • Helps to determine the strength of a trend.

Some disadvantages of the ACC/DIST indicator:

  • It cannot handle events with gaps.
  • It is based on closing prices and usually moves along with the price changes. It only shows divergences occasionally.
  • It is hard to recognise small changes in the trading volume. In an inclining trend, the volume change may be slow and it is impossible to recognise when the ACC/DIST does not turn.

Examples

Yahoo share price was around USD 12.5 for long time, but then it started to rise.  Money has started to flow in the instrument and the price broke out of the zone.

Acc/Dist indicator

Acc/Dist indicator

QQQ is an ETF tracking 100 Nasdaq securities. This example shows a verification of a trend’s weakening. When the share price was still in a deep point in March, the ACC/DIST was already increasing. In that period, the buy side was getting stronger, making the increase possible.

Acc/Dist indicator

Acc/Dist indicator

Intraday indicators are not able to handle movements with gaps. If a share opens 20% higher than its previous closing price and closes halfway between the opening and closing price of that day, the ACC/DIST will not signal anything unusual.