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Accumulation Distribution Oscillator Derivative

Fortid fortuna adiuvat.

Fortune favors the brave. Terence

For many years traders have attempted to find a method that will give insight as to the locus of control in a market. By this I mean the balance of power. The question as to whether the bulls or the bears are "in control" of a market is an important one, particularly for the day trader. If we know that the bulls are in control of a market, then we will do well to buy on declines, knowing that the market is likely to recover quickly from its drop. In a market that is controlled by the bears, rallies will be relatively short-lived, as sellers overpower buyers and the market returns to its declining trend.

By "control" I do not mean to imply that there is an actual group of buyers or sellers who are conspiring to control the direction of a market. Rather, I mean essentially "balance of power." In effect, the amount of buying power exceeds the amount of selling power or vice versa. Certainly, the balance of power will shift at some point, usually after the buying power and the selling pressure have reached a point of equilibrium and the tide changes direction. Although the trend can change rapidly in some instances, there are usually warning signs that precede changes in trend.

At times the indications are subtle, and at times they are obvious. But this is not always the case. And this is what makes trading systems imperfect. There is no certain way I know to detect when the balance of power will shift. The ideal situation of buying power versus selling pressure can be depicted graphically as shown in Figure 13-1.

In a perfect world we would like to see markets follow our paradigm as closely as possible. While this would make our task as traders more definitive, it would likely mean an end to free markets, since virtually every market trend and trend change would be predictable and there would, therefore, be no need to trade. Figure 13-1 illustrates the phases of a "normal" market as it moves from a neutral phase to a bullish phase and then to topping, bearish, and bottoming phases.

The accompanying 10-minute Swiss franc futures chart (Figure 13-2) shows how a market enters a topping time frame and then turns lower. Theoretically, as the market moves sideways, a change of control is taking place as the bears gain the upper hand. One interpretation of what is actually happening is that selling pressure outweighs buying power. During this sideways phase the bears are "distributing" contracts to the bulls. The bulls eventually reach a point where their cumulative buying can no longer sustain an uptrend, and the market drops as the bears continue their cumulative selling.