Market Accumulation and Distribution How to identify them?
Stock market experts say that smart money is created by trends. So, if the market grows, it is likely that previously large hedge funds, investment companies or other international financial institutions have opened large buy positions. When orders close, the price drops, a downtrend begins. Obviously, in order to make money in the Forex market, you need to understand the mood of smart money and have time to join them in time.
Accumulation and distribution are the two main phases of the market in terms of volumetric analysis. They allow you to determine the time when large players begin to build up their positions. Defining these phases is not so simple. Let's consider in the article how to find out what smart money is doing on the market now and to use this information for their own purposes.
Accumulation and distribution - what is it
From the point of view of VSA, accumulation and distribution are two basic concepts used in volume analysis. These stages of the market are described in detail in the books How to Make Money in the Stock Market and The Successful Investor by William O`Neill.
Since information on real trading volumes is available only on exchange markets, initially the theory of accumulation and distribution was applied exclusively to futures. Over time, traders saw that it was successfully operating in the spot market.
In order for a market participant with a large capital to open a purchase transaction, liquidity is required. Usually it is not enough to enter the entire volume once. How to be Typically, large players open positions in parts, using limit orders for this purpose. This happens in many ways. The simplest method of accumulating volumes is buying in a flat.
Large players accumulate volumes, which leads to the formation of support and resistance levels. After they have gained positions, there is an intensive price increase (upward trend) and the distribution stage begins, which will be discussed below.
Distribution is the process of phasing out a large position. It happens in the same way as accumulation. Volumes are closed in parts at approximately the same price level.
Examples of position accumulation on real charts
A classic example of the accumulation of positions by a market maker is the opening of orders on price corrections. As you know, the market does not move strictly up or strictly down. His movements are progressive. After individual sections of the upward direction, correction follows. This time is most suitable for the accumulation of positions by large market participants.
The market is growing. After a small section of growth, correction begins. Here, large players begin to accumulate positions, since the price after a decrease for them becomes more attractive. At the time of accumulation, in the indicator window at the bottom of the graph you can see the outlier. Strong support immediately forms and the price moves up again.
If you understand the logic of smart money in time, you can enter the market in one direction with them and collect profits from the beginning of the trend to the end of the trend, until the phase of volume distribution begins.
The accumulation of volumes occurs more often on candles, the direction of which is opposite to the global trend. However, this is not a pattern. Sometimes positions can also accumulate on rising candles within the correctional movement.