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Updated on March 5, 2023

In technical analysis, Distribution refers to the process of selling or transferring ownership of a security from one party to another, typically by institutional investors, such as mutual funds, hedge funds, and pension funds.

The term is often used to describe the selling of large positions in security, which can result in a downward trend in price. Analysts look for signs of distribution, such as increased selling volume, as an indicator of market sentiment and future price movements.

Why is it important to understand the distribution in technical analysis?

Distribution is considered important in technical analysis because it provides insights into market sentiment and can be used to make informed trading decisions. By observing the selling of large positions by institutional investors, technical analysts can gain an understanding of market sentiment and the potential future price movements of a security.

For example, the observation of high volume selling accompanied by a downward trend in price can indicate that a security is undergoing distribution, which may suggest that it is likely to continue to decline in value. This information can be used to make informed decisions about when to enter or exit a position.

Additionally, understanding distribution patterns can help traders to identify areas of support and resistance in a security’s price trend. This information can be particularly valuable for short-term traders who are looking to make quick profits from price movements.