Almost by definition, the only sure way of telling whether a range (sideways market) is a distribution range or an accumulation range is when there is a conclusive breakout or breakdown from the range. The range is where the battles took place, and whoever emerges from the battle is the victor.
- When there is a conclusive breakout and price climbs higher, the range was an accumulation range.
- When there is a conclusive breakdown and price goes lower, the range was a distribution range.
What’s the point of knowing that after the fact? Well for one, entering in the direction of the breakout / breakdown after a retracement to the edge of a range is still a very reasonable setup to take.
Are there any signs that can alert you before a conclusive breakout / breakdown? Here are some:
- Speed of moves – If price drops slowly, and moves back up over the same distance quickly, then it is a sign of accumulation. Conversely, if price goes up slowly and drops back down quickly, then it is a sign of distribution.
- Volume at price – Look at the Volume At Price for the range, ignore volume that occurred previously before price entered into this current range. If you see more volume at the upper part of the range, then it is a sign of distribution. If you see more volume at the lower part of the range, then it is a sign of accumulation.
- Prior trend – A range is usually where a trend catches its breath, forcing participants to re-anchor their price levels, before continuing on its move with renewed vigor. So look at the trend prior to the price entering this current range. If it was an uptrend, it is more likely that an uptrend will continue after this range. If it was a downtrend, it is more likely that a downtrend will continue after this range. Of course if a trend has progressed really far (with respect to the time frame that you are trading), you need to be more cautious of the range being a reversal.
- DOM moves – Watch the DOM while price trades within the range. You can get a sense of the aggressiveness and strength of the bull and bear sides. Notice things like the speed at which they fight back and reclaim a level, size of orders sitting on the ladder, amount of contracts aggressively taken while showing a small contract size on the bid/ask to lure suckers, reaction of the opposing side to large contracts on the ladder, etc.
If readers have other methods, please feel free to share them in the comments.