Introduction
I've been thinking about volume and price interaction a lot in the last few months, and playing around with some of the traditional indicators to see if they provide any edge. Indicators such as OBV (On Balance Volume), ADL (Accumulation/Distribution Line), CMF (Chaikin Money Flow), and a few others. In short, the ADL is one of the better ones in my opinion, and divergences between ADL peaks (or troughs) and price peaks (or troughs) can sometimes give clues about forthcoming changes in market direction. However, it's a bit hit and miss and, just like any other indicator, you can't rely on it without reference to other signals for better confirmation.
I think there are two reasons why the ADL isn't very accurate:
1. The possibility that Volume itself might not be a reliable indicator of future price movement.
This is highly debateable and I believe there are good points to be made both for and against this argument. And while I don't might discussing it a bit later in the thread if required, I'd rather leave it aside for now and see if we can obviate the need by producing a stronger version of the indicator. After all, the proof is in the pudding.
2. The ADL doesn't measure the relationship between volume and price very effectively.
While I can't do much about the first reason, I can try to create a better indicator. So in this thread I'll present a new version of the ADL, which I've cheekily called Better ADL (BADL) for now, and explain how it's different from the ADL and how we might be able to use it to our advantage. Please note that I mean no disrespect to the creator of the original ADL indicator, Marc Chaikin, and I value his immense contribution to this field.
As always, please bear with my slow pace. I'll try to post when I can but it won't be every day. Thank you.
Edit 28-Feb-1016: Latest version of the NinjaTrader indicator is here.
I've been thinking about volume and price interaction a lot in the last few months, and playing around with some of the traditional indicators to see if they provide any edge. Indicators such as OBV (On Balance Volume), ADL (Accumulation/Distribution Line), CMF (Chaikin Money Flow), and a few others. In short, the ADL is one of the better ones in my opinion, and divergences between ADL peaks (or troughs) and price peaks (or troughs) can sometimes give clues about forthcoming changes in market direction. However, it's a bit hit and miss and, just like any other indicator, you can't rely on it without reference to other signals for better confirmation.
I think there are two reasons why the ADL isn't very accurate:
1. The possibility that Volume itself might not be a reliable indicator of future price movement.
This is highly debateable and I believe there are good points to be made both for and against this argument. And while I don't might discussing it a bit later in the thread if required, I'd rather leave it aside for now and see if we can obviate the need by producing a stronger version of the indicator. After all, the proof is in the pudding.
2. The ADL doesn't measure the relationship between volume and price very effectively.
While I can't do much about the first reason, I can try to create a better indicator. So in this thread I'll present a new version of the ADL, which I've cheekily called Better ADL (BADL) for now, and explain how it's different from the ADL and how we might be able to use it to our advantage. Please note that I mean no disrespect to the creator of the original ADL indicator, Marc Chaikin, and I value his immense contribution to this field.
As always, please bear with my slow pace. I'll try to post when I can but it won't be every day. Thank you.
Edit 28-Feb-1016: Latest version of the NinjaTrader indicator is here.
You reap what you sow.