Also known as an accumulation line, a distribution line is a type of indicator used by investors and financial analysts to determine the future movements of prices within a given market. The focus of this technical analysis focuses on the volume of trading that is taking place within that marketplace, and what the movement of that volume indicates about future events. Generally, if the distribution line indicates that the volume of trading associated with a given stock or group of stocks is increasing, the price will also begin to increase, signaling the investor to buy now before that price increase actually takes place.
The distribution line is a tool that is sometimes classified as a momentum indicator. This is because assessing the volume of trading means looking closely at both the supply and the demand associated with a given stock or group of stock. The idea is to determine if demand will increase, which in turn leads to more active trading. If that is the case, then the price for the shares is likely to also increase as more and more investors seek to acquire whatever shares are currently up for sale.
Making the most of this situation calls for not only accurately assessing the distribution line in terms of noting a pattern of increased or decreased volume in trading, but also having some idea of how long the trend will continue. For example, if the distribution line indicates that trading is up, an investor may choose to buy shares now before prices begin to increase. At that point, the next step is to determine how long to hold those shares in order to gain the highest level of return. If the investor can determine that the trend is likely to continue for two or three months before it reverses, it is possible to have a general idea of when to offer those shares for sale, avoid the plateau and eventual decline in pricing, and walk away with a tidy amount of profit.
Assessing the distribution line to project future price movements is a relatively common strategy. For the most part, investors and others involved in trading situations will not rely solely on this approach to reach their conclusions. Rather, understanding the current status of the distribution line will be used in conjunction with several other indicators as a means of creating a system of checks and balances that is applied to the task of predicting those future movements. When that balance is maintained and all relevant factors are considered in relation to one another, the chances of making an accurate prediction and generating a return based on that prediction is greatly enhanced.
