Question 1 - Explain in your own words what the A/D Indicator is and how and why it relates to volume
The Accumulation and Distribution Indicator which is commonly known as the A/D indicator, is one of the top technical indicators and has proven to be a really powerful volume-based indicator when it comes to determining the trends of a cryptocurrency market by making use of volume and price in its calculation. A/D Indicator is basically a volume-based indicator that determines if a particular cryptocurrency is accumulated or distributed based on volume. The cryptocurrency market comprises of cycles. If a cryptocurrency is being accumulated, it means that the buying pressure is high, this is due to increase in demand which in turn increases the buy volume and also increases the price. On the other hand, if the cryptocurrency is being distributed, it means that the selling pressure is high due to increase in supply which in turn increases the sell volume and also decreases the price.
A/D indicator on the AAVE/USDT Chart
The A/D indicator relates to volume because it makes use of volume in its calculation to determine accumulation and distribution based on the volume and price action. It does this by taking into account the close price and then multiplying the close price by volume. Also, it identifies divergences between the price of a particular cryptocurrency and the volume flow. With this, it provides a string indication of the strength of a trend in the market. If there is an increase in price but the A/D indicator oscillator line is falling, it can be an indication that the buying pressure isn’t strong enough to maintain the upward price movement which could see the price reverse downwards. Also, if there is a decrease in price, but the A/D indicator oscillator line is rising, it can be an indication that the selling pressure isn’t strong enough to continue pushing the price down, which could see the price reverse upwards. From the BNB chart below, we can see that the A/D indicator has indicated that the market is in accumulation phase which as clearly seen on the price movement.
Question 2 - Through some platforms, show the process of how to place the A/D Indicator
For this demonstration, I will be making use of the tradingview platform to show how to add the A/D indicator on a chart.
To do this, we have to visit the tradingview website at https://www.tradingview.com. Click on the indicator icon which is at the top
On the indicator search, type in the name of the indicator to search for it in the library. I typed in AD on the search. Click on the the Accumulation Distribution to add the indicator on the chart
In the Accumulation/Distribution indicator area, click on the settings icon
There are three main sections on the A/D indicator settings; input section, styles section and visibility section.
Input - The A/D indicator doesn't have any inputs, however, the timeframe can be changed. By default, it is set to sane as chart.
Styles - The styles settings allows the colour and line thickness of the A/D oscillator line to be changed based on preference.
Visibility - The visibility allows the different elements to be toggled on or off depending on the technical analsys needs.
Question 3 - Explain through an example the formula of the A/D Indicator
A/D Indicator Calculation
When it comes to A/D Indicator Calculation, two parameters are taken into consideration; the money flow multiplier and the money flow volume. The money flow multiplier basically focuses on the close price, high price and low price.
To calculate the Money Flow Multiplier (MFM)
MFM = (CP – LP) – (HP – CP) / (HP – LP)
Closing price = CP
Highest price = HP
Lowest price = LP
To calculate the Money Flow Volume (MFV)
= (MFM) x (PV)
Money Flow Multiplier = MFM
Period Volume = PV
Accumulation/Distribution = (P A/D) + (CPMFV)
Previous A/D = P A/D
Current Period Money Flow Volume = CPMFV
Let’s take for instance, AAVE/USDT
Close price = $307
Lowest price = $270
Highest price $324
MFM = (307 - 270) - (324 - 307) / (324 – 270)
MFM = (37) - (17) / (54)
= 20 / 54
MFM = 0.37
MFV = (MFM) x Period Volume
MFV = 0.37 x $7,889,000
MFV = $2,918,930
The Accumulation/Distribution = $7,889,000 + $2,918,930
A/D = $10,807,930
Question 4 - How is it possible to detect and confirm a trend through the A/D indicator?
The accumulation/distribution indicator makes it easy to easily identify trends based on the movement of the oscillating line. It has proven to be a very good indicator in detecting and confirming trend.
When the market is moving in an uptrend, the A/D oscillator line will also be moving in the same direction. This basically means that there is money flowing into the market as more and more buyers are accumulating. This shows that there is an increased demand for the cryptocurrency asset, which increases the buying pressure and in turn drives the price up.
When the market is moving in a downtrend, the A/D oscillator line will also be moving in the same direction. This basically means that there is money flowing out of the market as more and more sellers are selling and causing the distribution. This shows that there is a decreased demand for the cryptocurrency asset, which increases the supply and the selling pressure and in turn drives the price down.
The A/D indicator can be used to identify potential trend reversal in the market. This signal happens when there is a divergence between the price movement and the A/D indicator movement. If the price is falling and the A/D oscillator line is rising, it can be an indication that the selling pressure isn’t strong enough to continue pushing the price down, which could see the price reverse upwards.
Question 5 - Through a DEMO account, perform one trading operation (BUY or SELL) using the A/D Indicator only
Buy – MATIC/USDT
On the MATIC/USDT chart, I was made use of the A/D indicator for buy signal on the MATIC/USDT pair on the 30 mins time frame. The big body candlestick along with the upward slope of the A/D oscillator line showed that the buyers are still in control and buying pressure is strill holding strong. For me, that was a good buy signal. I entered the market at 1.351 USDT and using the 2:1 risk-reward, I set my take profit at 1.371 USDT and my stoploss at 1.341 USDT. After placing the buy trade, I was able to make profit from the trade.
Question 6 - What other indicator can be used in conjunction with the A/D Indicator.
When it comes to making use of technical indicators for technical analysis in identifying trends and predicting future price movements, it is important to always combine more than one for signal confirmations. The A/D indicator has proven to be a very powerful indicator for determining the trends in the market and also predicting trend reversals just by the movement of the oscillating line. However, it is always a good idea to combine the A/D indicator with another indicator like moving average, RSI or MACD for confirmations.
For this, I will be combining the A/D indicator with the RSI indicator. The RSI indicator is a very powerful indicator that indicates overbought and oversold of a particular cryptocurrency. When the RSI line is below 30, it means that the price is in oversold zone, and when the line is above 70, it is in overbought zone. This can be used for confirmation for the A/D indicator. If the A/D indicator line is falling along with the price, and the RSI is falling and moving towards the oversold zone, it means that there is a downtrend movement.