Last Updated on July 17, 2022 by Oddmund Groette
There are many tools investors use to measure investors’ sentiment in the stock market, but the advance/decline indicator is one of the simplest ones. But what does the advance-decline indicator mean?
Often referred to as the advance/decline index or advance/decline (AD) line, the advance-decline indicator is a market breadth indicator that plots the cumulative difference between the number of advancing and declining stocks on a daily basis. It is used to confirm the current stock index trend, but can also be used to predict potential stock index reversals when there is a divergence between the indicator and the stock index direction.
Keep reading to learn more!
What is the advance-decline indicator?
The advance-decline indicator, also known as the advance/decline index or advance/decline (AD) line, is a market breadth indicator that plots the difference between the number of advancing and declining stocks within a given stock index.
It is a cumulative indicator, so each new value is added to the prior number if the value is positive, or subtracted from the prior number if the value is negative. While this indicator can be calculated for any time frame, it is mostly calculated for the daily trading session.
The A/D indicator shows market sentiment by telling traders whether more stocks are rising or falling. It is used to confirm the current stock index trend, but it can also be used to predict potential stock index reversals when there is a divergence between the indicator and the stock index direction. When the A/D index value is rising, it suggests that the market is gaining momentum. On the other hand, when the value is falling, it suggests that the market may be losing momentum.
What is the advance/decline issues?
Advance/decline issues refer to the list of the stocks that are advancing and those that are declining for any given trading day. Advancing issues are stocks that are advancing in price. A stock is considered as advancing stock if it is traded above the previous trading day’s close price.
Likewise, declining issues are stocks that are declining in price; a stock is considered a declining stock if it is traded below the previous trading day’s close price.
What is advanced decline distribution?
This refers to the distribution of advancing and declining stocks on a given stock exchange. The advance/decline distribution shows the number of advancing and declining stocks and traded volume associated with these stocks within a market index, stock market exchange, or any basket of stocks with the purpose of sentiment analysis within the given group of stocks.
These data are used to measure the overall market breadth and also to measure sentiment within the stock market sectors.
What is advance/decline volume?
The Advance Volume refers to the cumulative total number of shares of advancing stocks traded within a given timeframe, usually a day. Likewise, the Decline Volume refers to the cumulative total number of shares of declining stocks traded within a given timeframe, usually a day.
The indicator that measures the cumulative difference between the Advance Volume and Decline Volume on a daily basis is known as the Advance/Decline Volume Line. It cumulates these differences, called net advancing volume, by adding them to the previous indicator value, effectively calculating a running total.
The Advance/Decline Volume Line can be used to confirm the strength of a trend — a rising Advance/Decline Volume Line points to buying pressure, while a declining value points to selling pressure. A divergence between the indicator and price movement may indicate a potential trend reversal.
Advance-decline line formula
The formula for calculating the Advance/Decline line is as follows:
Advance-Decline Line = Current Day’s Advancing Stocks – Current Day’s Declining Stocks + Previous Net Advances
- Current Day’s Advancing Stocks refers to the number of stocks that increased in value on the given day
- Current Day’s Declining Stocks refers to the number of stocks that decreased in value on the given day
- Previous Net Advances refers to the previous day’s A/D Line value
What is the NYSE advance-decline line?
This is the advance-decline line of the stocks on the New York Stock Exchange. It can also be referred to as the A/D line of the NYSE composite index, which is a stock market index covering all common stocks listed on the New York Stock Exchange, including American depositary receipts, real estate investment trusts, tracking stocks, and foreign listings.
In essence, the NYSE advance-decline line, therefore, is the cumulative difference between the number of stocks on the NYSE that are advancing and the number of stocks on the exchange that are declining on any given day.