A volume-based (momentum) indicator that is designed to measure the cumulative flow of money into and out of a specific stock. As a technique, it involves the buying of shares in large quantities in expectation of a substantial increase in the stock price of a given company, by traders and investors who are particularly knowledgeable of the company’s business and activities and think its stock is undervalued with respect to its fundamentals. The accumulation phase is the initial phase of a major upward trend when sharp-eyed investors start buying the stock, driving demand for it beyond supply. At this stage, the stock is said to be going from weak hands to strong hands. The distribution phase is ushered in when a significant amount of shares are sold in expectation of a major decrease in stock price. Also, traders/investors, who conclude the stock is overvalued, will do the selling upon amassing vast knowledge about the company’ whereabouts. Distribution pushes stock prices down on significant volume that is going from strong hands to weak hands.

As a figure, accumulation and distribution constitutes a running total of each period’s money flow volume. First, a multiplier is calculated based on the relationship of the close to the high-low range. Second, a money flow volume is calculated by multiplying the money flow multiplier by the period’s volume. A running total of the money flow volume forms the accumulation/distribution line. Chartists/technicians use this indicator to be assured of a security’s underlying trend or foresee reversals when the indicator diverges from the stock price. Therefore, for instance, if the accumulation/distribution indicator is moving downward and the stock price is going up, a reversal in price is likely. To calculate accumulation/distribution, the following formula is used:

Volume x = < (close- low) – (high – close)/ (high- low) >

Accumulation and distribution is also referred to as the cumulative money flow line.