In this article, We learn about "Accumulation Area".Let's Go!
The “accumulation area” in trading refers to a price range in which sophisticated investors, often referred to as “smart money,” start to buy or “accumulate” a security in large quantities over a period of time.
This usually happens when the investors believe that the security is undervalued and will increase in price in the future.
Smart investors use this phase to accumulate the stock because of the limited volatility and the likelihood that the security is trading at a discount.
The hope is that once the market sentiment becomes more bullish, the security will break out of this accumulation area and start a new upward trend.
What is accumulation?
Accumulation often happens during the consolidation phase of the market or a specific security, where there isn’t a clear upward or downward trend.
Prices fluctuate within a specific range during this phase, and the market seems to be flat, as traders and investors are not pushing the price significantly in either direction.
The accumulation area represents a period of buying, typically by institutional buyers, while the price remains fairly stable.
On a price chart, the accumulation area is described by mostly sideways price action with above-average volume.
It may signal that large institutional traders are buying, or accumulating, large quantities of an asset over time.
The accumulation area is important for traders to recognize when making buy and sell decisions.
Identifying the accumulation area helps traders spot good entry points before the price begins to rise.
The accumulation areas can be challenging to identify in real time and are more often recognized in hindsight. Traders often use volume-based indicators, such as the On-Balance Volume (OBV) or the Accumulation/Distribution Line, to help identify potential accumulation areas.
The accumulation area signals the possibility of a breakout.
When the price doesn’t fall below a certain price level and moves in a sideways range for an extended period, this can indicate that the asset is being accumulated by institutional buyers and as a result will break out to the upside soon.
The opposite of the accumulation area is the distribution area.
The distribution area is where institutional traders begin selling.
Being able to recognize whether an asset is in the accumulation zone or the distribution zone is critical to trading success.
The goal is to buy in the accumulation area and sell in the distribution area.