Accumulation distribution indicator (ADI)

Before reading this lesson, you should have previously read through:

The accumulation distribution indicator (ADI) is a momentum indicator that traders use to predict reversals in a trend by identifying tops and bottoms.

The ADI is an indicator that helps predict reversals. It tracks the relationship between an asset’s price and the number of bulls and bears in that market.

It does this by showing the relationship between the price of an asset and the number of buyers and sellers in that market. Traders determine whether there are mostly bulls (accumulating) or bears (distributing) in the market by identifying a divergence between the price and the indicator.

For example, if an asset is in an overall downtrend but the price has recently increased, this can signal that demand for the asset is starting to increase – the sellers are losing power and the buyers are starting to gain power. The ADI will start to head in the opposite direction, away from the price, suggesting a reversal may occur.

The chart below demonstrates the accumulation distribution indicator:

adi example chart

Using the indicator – look for divergence from the price

In order to use the ADI for trading decisions, look for divergence between the indicator and the price movement.

When seeking to make a long trade, look for the price to make lower lows while the indicator makes higher lows, and vice versa.

When looking to make a long, or buy, trade for example, you would look for the price to make lower lows while the indicator makes higher lows. This signals that the market may have completed its current downward move, and may now be preparing to move up.

The chart below demonstrates how this appears in a real trading example:

ADI example 2

As you can see in the highlighted area on the chart above, at the same time as the price was making a lower low, the indicator was making a higher low, thus diverging away from the price and giving a bullish signal.

Exercise: What chart shows a bullish signal? Show exercise

The following chart shows an example of the ADI giving a bearish signal that the price may soon move down:

Accumulation distribution indicator 3

As you can see in the highlighted area on the chart above, the price is making higher highs, while the indicator is making lower highs. This signals that the current uptrend may be coming to an end and that a downward move could be about to begin.

Exercise: What chart shows a bearish signal? Show exercise

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The ADI works best in ranging markets

The accumulation distribution indicator is particularly effective when the market is ranging or moving sideways with no strong moves in any direction.

See the image below for an example of how a ranging market appears on a chart:

ADI ranging market

When the market is trending, divergence-based strategies can sustain heavy losses as the market constantly pauses and then continues, drawing false entry signals from the indicator.

The ADI can trigger false entry signals and losses if used in a trending market.

See the image below for an example of how a trending market appears on a chart:

ADI example on a trending market

One way to avoid these losses during a trending market is to trade using the indicator in line with the trend only, which means that if the market is moving up very strongly for a sustained period of time, then you would only look for buying opportunities as the market pulls back down against the trend and retraces.

Conversely, if the market is trending very strongly down, then you would only look to trade sell signals as the price retraces back up against the trend.

This strategy can protect you from sustaining heavy losses and strings of losing trades during extremely strong trends.

Summary

In this lesson, you have learned that ...

  • … the Accumulation Distribution Indicator is an indicator that traders use to predict reversals in a trend.
  • … it can help locate possible bottoms from where a falling price may start rising, and possible tops from where a rising price may start falling.
  • … it works by tracking the relationship between the price of an asset and the number of buyers and sellers in that market.
  • ... it determines whether traders in the asset are mostly bulls (accumulating) or bears (distributing) and helps identify a divergence from recent and current price movements.
  • … when seeking to make a long trade, look for the price to make lower lows while the indicator makes higher lows.
  • ... when seeking to make a short trade, look for the price to make higher highs while the indicator makes lower highs.
  • … the ADI is particularly effective in ranging markets.
  • … the ADI can trigger false entry signals if used in a trending market.
  • … this can be avoided by only using the ADI in line with the trend – in a rising market look for buy signals as price retraces from the trend, in a falling market look for sell signals as price retraces from the trend.

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  • I believe there's a mistake in the first exercise:

    "The answer is: number_3 The ADI indicator is making a lower high while the price is making a higher high giving us a potentially bearish signal."

    It should instead read the opposite: the ADI is making a higher low while price is making a lower low, giving a bullish signal.
  • Hi Redline,

    thanks for pointing out. We will amend the article.
    Regards.
    Peter
  • Hello Peter; Just a quick Question.

    Is the ADI (accumulative Distribution indicator) the same as ASI ( Accumulative Swing Index) in etorro ? thanks
  • Hi Tarek,

    No. The ASI is more of a momentum or breakout indicator, whereas, ADX measures the strength of a trend.
    Regards
    Peter
  • Hi Peter, am refering to the ADI ( Accumulation Distribution Indicator) in thias lesson not the ADX ( Average Directional Index).. so as you have said, does this conclude that ASI (Accumulative Swing Index) and ADI(Accumulation Distribution Indicator) are the same since they both measure momentum?
  • I tried to find out how they are calculated, but I didn't get the formula for the ADI, so unfortunately, I cannot confirm, if they are the same or not, but my guess is, they aren't.

    Have you tried comparing the chart of the same asset with ADI and ASI, if they look any different?
  • yes i have actually compared them and they look exactly the same. i think etoro just names it diffeently.

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