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• The advance/decline (A/D) line is a breadth indicator that plots the difference between advancing stocks and declining stocks.
• A/D line should move in the same direction as major indexes to confirm the move.
• If it doesn’t, it’s a sign the rally or decline is nearing its end.

What is the A/D line ?

The advance/decline (A/D) line is a breadth indicator that plots the difference between advancing stocks and declining stocks. The difference indicates the participation of all the securities in the overall movement of a market’s index. The value is positive when the number of advancing stocks is greater than the declining stocks and vice versa. Once the A/D ratio confirms the movements in the same direction when compared with the index, it indicates either bullish or bearish momentum divergence. The failure of confirmation highlights the risk of a trend reversal. The advance/decline line indicator is especially more useful when trading the main indexes such as the S&P 500, DAX, Dow Jones Industrial Average, etc.

Basically, the advance/decline ratio gives an idea of what the market participants are doing when the market is slumping or rallying. A/D ratio actually indicates a key market sentiment that highlights whether more stocks are rising or declining at a particular point of the trading day. The purpose of the use of the A/D line is the confirmation of trends in the market indexes and to indicate the reversals when divergences occur. Moreover, it is also interesting to note that the advance/decline indicator is a cumulative one that works by adding positive numbers to the previous value and subtracting negative numbers from the previous value.

How to calculate the advance/decline ratio?

The advance/decline ratio or advance/decline line calculation is very simple. The A/D ratio has the following formula.

There are two simple steps to calculate the advance/decline ratio.

• Calculate the net advances by subtracting the stocks finishing lower on the day from stocks finishing higher.
• Calculate the net advances on the next day by adding positive value to the prior day’s total or subtracting negative value from the previous total.