This indicator was developed by Marc Chaikin based on the following works:
- "On Balance Volume" – indicator introduced by Joe Granvill;
- "Accumulation/Distribution" index by Bill Willam.
In measurement formula for Joe Granville indicator, close prices compared with the purpose of adding or deducting of volume, whereas Williams' indicator open and close prices are compared. Marc Chaikin compares close prices with the middle of range from minimum to maximum. The history of indicator is interesting on its own. In Larry Williams formula, Chaikin substituted open price for price of range. The reason of change was not that he considered it wrong, but that he was not able to find data on prices of opening. That time prices were taken from daily papers, which, due to some reason, stopped publishing prices of opening.
Originally, this indicator served measuring of price flow. Its also underlies in the basis of Chaikin Oscillator.
Measurement of Accumulation/Distribution indicator:
Close – close price
Low – minimal price
High – maximum price
Volume – volume
ADn – value on current candle
ADn-1 – value of current price
- When currency is closed on the highest level within trading range, value will be equal to 1;
- When contract closes above the middle point (closer to maximum), the range between zero and one will be multiplied into volume;
- When contract closes in the middle between lowest and highest points, the value is one;
- If closure is below the middle point (closer to minimum), then negative range between zero and minus one will be multiplied into volume;
- When contract closes on the lowest point, then volume multiplied into value will be minus one.
Disadvantages of the indicator
- The indicator does not account for market gaps. In case currency opens with gap and closes in the middle between lowest and highest points, gap itself will not be accounted. In case of serial losses, indicator will show considerable errors.
- Accumulation/Distribution indicator sometimes moves in the way that is similar to asset's way (basis asset for measurement of the indicator), in this regard it omits a number of divergences.
- Sometimes it is difficult to define when changes of volume take place. For instance, speed of trend can slow down, but it impossible to determine until Accumulation/Distribution indicator takes a reversal position.