I am glad to participate in season 4 of @cryptoacademy and in this post I am going to discuss the A/D indicator and will develop some understanding of it. This homework is given by Professor @allbert and I hope that you will like it. So let's get started.
Explain in your own words what the A/D Indicator is and how and why it relates to volume. (Screenshots needed).
A/D indicator is one of many indicators used by traders to get signals about future trading. It is comprised of two main aspects of the market i.e Accumulation and Distribution. The indicator is based on the volume of the commodity which determines the market position either it is bullish or bearish.
Accumulation relates to the increase in the demand or the people get a hold on the following asset which increases the value of the asset. Furthermore, accumulation is termed as the increase in the value of the asset which indicates the high demand in the market.
- In the above screenshot, we can detect an uptrend which is an example of accumulation i.e caused by the increase in the number of buyers or more traders trying to hold on to the asset.
Distribution occurs at the beginning or during a downtrend movement of price, which results from an excess supply of the asset caused by the bullish rally profit-taking. Since investors will want to take profits (few or large) from the positions they took at low prices ( they are going to distribute the asset).
In the above chart, we can see that after the accumulation phase a distribution phase started due to which the price of the asset started to fall. This is caused by the number of traders leaving the market or selling their assets.
We have known that the volume of the asset indicates the liquidity of the marketplace and with the A/D indicator we're essentially having a dimension of the liquidity created inside the cryptographic asset. The quantity may be diagnosed in both a downtrend and an uptrend, due to the fact we're going to notice if there's a buying or a selling force within the market and the distribution indicator tells us if there is lots of cash within the asset or if otherwise, the asset is being taken out.
Then we will get a pure relation among the indicator and the volume due to the fact if we're in an accumulation we are in an upward trend, we will say that the asset is being sold and therefore the extent of liquidity has to be rising because of the buying force inflicting the market for a rise.
Through some platforms, show the process of how to place the A/D Indicator (Screenshots needed)
- To place the A/D indicator, I have chosen Tradingview platform as it is easy to use and easily available.
- First search tradingview and open it, then click on the chart section and a chart of any currency or asset will open.
- Then you have to find Indicators on top of the chart and click on it.
- In search bar type accumulation and Accumulation and Distribution indicator will appear to click on it.
- After clicking, a graph will appear below the chart which is of the A/D indicator.
- You can manage settings of the A/D indicator by clicking on the settings option on the graph and a pop-up will appear.
- You can change Styles and timeframes through these settings to get a better trading experience.
- I have them all set on Default setting.
Explain through an example the formula of the A/D Indicator. (Originality will be taken into account)
In this question, I will be explaining the formula for the A/D indicator through an example
There are three parameters for the calculation of the A/D indicator.
- Money flow multiplier
- Money flow volume
- Previous Accumulation /Distribution line
As, to get started firstly, we have to evaluate the previous accumulation and distribution line. So, after that, we have o multiply the current money flow multiplier and money flow volume and then sum up to the previous accumulation and distribution.
AD =P(AD) +MFM×MFV
AD =Accumulation /Distribution
P(AD) =Previous Accumulation /Distribution
MFM=Money flow multiplier
MFV=Money flow volume.
To calculate the MONEY FLOW MULTIPLIER (MFM) :
MFM= [(C - L) - (H - C) / (H - L)]
To calculate the MONEY FLOW VOLUME (MFV) :
Money flow volume is the outcome of the money flow multiplier and volume of the interval.
MFV=MFM × VP
VP = Volume for the interval
As above is the all data that we should be able to find in a chart Now, I will evaluate with the example in detail to determine the A/D indicator with the help of formula.
Closing price = 0.6267
High of the price = 0.6257
Low of the price = 0.619
Volume = 18.541k
Previous A/D= 35.266M
- MFM = [(closing price - Low of the price) - (High of the price- closing price)] / (High of the price- Low of the price)
MFM = [(0.6267 - 0.619) - (0.6257- 0.6267)] / (0.6257- 0.619)
MFM = 1.298
Now find MFV,
MFV = MFM × VP
MFV = 1.298 x 18,541
MFV = 24,075.62
Now for AD, we get,
AD = P (AD) + MFM × MFV
AD = 35,266,000 + 1.298 x 24,075.62
AD = 35,297,250.16
How is it possible to detect and confirm a trend through the A/D indicator? (Screenshots needed)
- In this question we will describe the use of the A/D indicator in finding different trends because this indicator is very helpful in this matter.
Uptrend / Bullish
- Uptrend is formed when the value of the asset is continuously increasing by forming the points of lower-highs and higher-highs on the chart and the A/D indicator also follows the uptrend. When many buyers are buying a particular asset, such that the price keeps shooting up and the A/D indicator also is going in the same direction with the price, then such an asset is said to be in an uptrend. Let's see the screenshot below,
- From the above chart, we can see that the Price of the Fantom coin is increasing continuously. This is because the market is in the accumulation phase and the price of assets is moving upward, indicating a bullish trend.
Downtrend / Bearish
An asset is said to be in a downtrend or bearish region when there are series of Lower-highs and lower-lows region is formed continuously and A/D indicator also shows a decline in this region. But if the price of an asset is moving in a direction and the A/D indicator is moving in an opposite direction, the change of a trend may be around the corner.
- In the above chart we can observe that the price of assets is falling continuously, hence a downtrend can be seen in the A/D indicator graph informing us that market is in the distribution phase and follows a bearish trend.
Through a DEMO account, perform one trading operation (BUY or SELL) using the A/D Indicator only. (Screenshots needed)
In this part, I am going to show the trade of TRXUSDT in which I took a sell strategy by using A/D indicator,
- I have found out that the A/D indicator and chart of TRX showing different trend lines so I first drew a trend line to find out about the divergence and wait a while until the chart started to show a downtrend signal.
- When the chart hit according to the analysis I took a sell entry at 0.10465$ and have a short-term trading policy.
- I put 200 TRX on sell order and you can see in the below screenshot that my trade is still going on with a profit of 0.21%
- I set my stop loss at 0.10487$ to complete my risk management homework and to have minimum losses.
What other indicator can be used in conjunction with the A/D Indicator. Justify, explain and test. (Screenshots needed).
Here you can see I implemented EMA AND *MACD (15 min time frame)to derived better result for bearish divergence in the market thus there was also a bullish cycle to but a perfect mode of bearish deviation is extracted with the help of AD smoothly confirming the transaction nodes and all Indicator in parallel maintaining a perfect sell zone in the bearish market.
The above chart shows the price 0.634$ and 0.622$ are maintaining consolidation with respect to each Indicator whilst the consolidation is broken with the strategy of three black crows resulting me the Downward cycle would be starting soon thus I implementatedEMA and AD for better confirmation thus AD distribution is also expected and with *MACD * (0.0015) attribute visualize me the downward zone and easily bearish divergence is extracted.
These were three indicators a perfect match up is shown whilst i used RSI to but not a balance movement ain't met though its up to a trader who actually embedded with time frames and other techniques to improve and derive their positions. Thus my strategy is crystal clear and provides me a fruitful result to encourage bearish divergence in market.
A/D indicator help us to develop our understanding with the role of volume in trading. Sometimes we get into a trade when it was increasing but face a loss afterwards, why? Because when the price surges we thought that it will continue its trend but unfortunately the volume of asset was not enough to hold the price at that position and soon fall down. A/D indicator told us about those volume related signals to prevent the losses in trade.
In the end, I want to thank Professor @allbert for this lecture because it helps me to increase my technical analysis knowledge and help me in my future trading.