This indicator was developed by Mark Chaikin. It is based on the On-balance volume indicator, as well as on the accumulation/distribution index. The main point of the AD (Accumulation Distribution) indicator consists in the need to compare the closing price with the average price range from one extreme point to another.
Accumulation/Distribution indicator: basics
Interestingly, the appearance of this indicator became possible because of the pure accident. Chaikin has used the closing prices from the daily newspapers, and these newspapers stopped to publish the opening prices at some time. For this reason, the indicator’s developer had to use the average price range.
As soon as this indicator had been developed, it started to be successfully applied for the calculation of the money flow directed for the investments in stocks. However, as a result, the indicator was successfully applied for the speculation in the international exchange market too. Given the fact that binary options can be currently designed for currencies, goods, and stocks, this indicator works perfectly with almost all binary options. It is necessary to note that later the accumulation/distribution indicator became the basis for the Chaikin’s oscillator.
It is suggested that the majority of closing prices are striving to the maximum of trading period within the ascending trend. In addition, while other traders join the trend, the trading volumes of the particular security or currency grow too. As for the descending or the bearish trend, everything occurs quite opposite. However, the volumes grow or, at least, exceed their average values too.
How to use AD indicator?
This indicator shows whether there is the particular market strength behind the current trend. In other words, it shows whether this trend deserves attention. When the Accumulation/Distribution indicator is used as an auxiliary tool for trading, it helps to determine whether the trade operations’ volume grows in the process of buying or sale of underlying assets. If the indicator’s line is directed up, it means that the buyers have the overwhelming superiority in the market currently. And if the line of the AD binary options’ indicator is directed down, we can conclude that the bearish moods are prevailing in the market.
Also, you can use this binary options’ indicator in order to find all sorts of divergences (divergence between the indicator’s showings and the current market price. Usually, it sends a pretty strong signal that the current trend will change) and to determine the strength which appears to be the driving force of the current trend.
The indicator can send the particular signals to the binary options’ traders, and these signals will provide a trader with the possibility to determine the current trend and its strength correctly. If the AD binary options’ indicator grows and the prices on a chart grow too, then the ascending trend exists, so you can buy the Call option. Otherwise, if the prices on a chart update their minimums and the indicator’s line moves down, then you can buy the Put options
When the price chart updates its maximums, but, at the same time, the indicator’s line is directed down, this is the bearish divergence. In other words, it is assumed that the bullish trend will change in the nearest time. The opposite situation applies to the bullish divergence, when the prices on a chart continue updating minimums and the indicator’s line is directed up. In this case, it is assumed that the trend will switch to the bullish one soon.
Nevertheless, the Accumulation/Distribution indicator has a number of disadvantages. For example, it doesn’t take into account price gaps that may occasionally occur on a chart. If the number of such price gaps grows, errors will appear in the indicator’s calculations. So, you have to follow its appearance closely. Another disadvantage is that the indicator duplicates the price movements accurately, especially when it comes to the closing price. In this case, the indicator can omit some divergences.