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The accumulation distribution line (ADL) was developed by Marc Chaikin. It was then referred to as the Cumulative Money Flow Line. Whatever you may call it, the ADL attempts to calculate the inflow and outflow of money by assuming that the green candle’s volume is accumulation and a red candle’s (bear candle) volume is distribution. These points are then plotted to create an upward line denoting accumulation and downward moving line denoting distribution.
The Accumulation Distribution Line (ADL) can be calculated using three steps. First, calculate the Money Flow Multiplier. Second, multiply this value by volume to find the Money Flow Volume. The Accumulation Distribution Line (ADL) is then created through the third step by running total of Money Flow Volume.
1. Money Flow Multiplier = [(Close – Low) – (High – Close)] /(High – Low)
2. Money Flow Volume = Money Flow Multiplier x Volume for the Period
3. ADL = Previous ADL + Current Period’s Money Flow Volume
Here is a chart of State Bank of India (SBIN). A very quick observation shows us that the closing of the candle is of extreme importance. This is what we also saw in the calculation above. To oversimplify it, a red bar is shown as a drop on the AD line and a green bar is shown as a rise on the AD line. The cumulative total is plotted and we can see visually if there was an overall accumulation or a distribution pattern in the stock.
The green highlighted area shows a green bar and the uptick of the accumulation/distribution line, the logic is that the volume traded during the day largely pushed the markets up–hence, a green bar.
The yellow highlighted area shows a red bar on state bank of India; and the downtick of the accumulation/distribution line.