The Accumulation Distribution Line is a volume-based indicator designed to measure the cumulative flow of money into and out of a security. The indicator was developed by Marc Chaikin and he referred to it as Cumulative Money Flow line. This indicator attempts to measure the ratio of buying to selling by comparing the price movement of a period to the volume of that period.
First, a multiplier is calculated based on the relationship of the close to the high-low range. Second, the Money Flow Multiplier is multiplied by the period’s volume to come up with a Money Flow Volume. A running total of the Money Flow Volume forms the Accumulation Distribution Line. Chartists can use this indicator to affirm a security’s underlying trend or anticipate reversals when the indicator diverges from the security price.
There are three steps to calculating the Accumulation Distribution Line.
Calculate the Money Flow Multiplier.
Money Flow Multiplier = [(Close – Low) – (High – Close)] /(High – Low)
Multiply this value by volume to find the Money Flow Volume.
Money Flow Volume = Money Flow Multiplier x Volume for the Period
Create a running total of Money Flow Volume to form the Accumulation Distribution Line (ADL).
ADL = Previous ADL + Current Period’s Money Flow Volume
The Money Flow Multiplier fluctuates between +1 and -1. As such, it holds the key to the Money Flow Volume and the Accumulation Distribution Line. The multiplier is positive when the close is in the upper half of the high-low range and negative when in the lower half. This makes perfect sense. Buying pressure is stronger than selling pressure when prices close in the upper half of the period’s range (and visa versa). The Accumulation Distribution Line rises when the multiplier is positive and falls when the multiplier is negative.
The multiplier adjusts the amount of volume that ends up in the Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1). The multiplier is +1 when the close is on the high and -1 when the close is on the low. All volume is positive when +1 and all volume is negative when -1. At .50, only half of the volume translates into the period’s Money Flow Volume.