This technical indicator guide explains what the Advance-Decline index is, what it shows traders, and how you can calculate it on a chart.
We provide an example below to demonstrate how it works, along with explanations for each marker on the example chart.
What Is The Advanced Decline Line?
The Advance-Decline Line is used primarily to confirm price movement and detect divergences. The calculation of the Advance-Decline Line is quite simple:
New York Stock Exchange (NYSE) Advancing Issues – NYSE Declining Issues
The calculated number is then added to the previous day’s Advance-Decline Line.
Whether the total is positive or negative is irrelevant; what is relevant is the direction or the trend of the Advance-Decline Line.
What Does The Advance-Decline Line Show?
An increasing Advance-Decline Line is bullish because more stocks at the NYSE are closing the day with gains; whereas a decreasing Advance-Decline Line is bearish because more stocks are closing the day with losses.
The Advance-Decline Line is a powerful confirmation tool and divergence warning tool.
The above chart of the mini-Dow future contract of the Dow Jones Industrial Average or Dow 30 represents these confirmation and divergence signals:
High #1 to High #2
The mini-Dow future contract made a higher high at High #2; however, the Advance-Decline Line failed to make a newer high, in fact, it made a lower low.
At High #2, fewer stocks were participating in the rally; thus, there was less strength behind the rally in the Dow Jones Industrial Average. This failure of the Advance-Decline Line signaled a strong bearish divergence.
High #2 to High #3
This is an example of the Advance-Decline Line confirming the trend in the price of the mini-Dow future.
The mini-Dow future made lower highs and likewise, the Advance-Decline Ratio made lower highs.
Low #1 to Low #2
Yet another bearish divergence occurred from Low #1 to Low #2. The mini-Dow futures contract made a higher low, an acknowledged bullish sign.
However, the Advance-Decline Line did not confirm the mini-Dow future’s ascent. In fact, during the entire rally of the mini-Dow from Low #1 to Low #2, the Advance-Decline Line was making lower lows.
This bearish divergence signaled that stock investors and index futures traders should be wary of the recent increases; the market as a whole is not behind the recent move higher.
In conclusion, the Advance-Decline Line is a very effective tool to confirm price action in stocks and stock indexes as well as signaling potential reversals or weak price moves.
Another similar indicator is the Arms Index [TRIN].
Where To Start Trading And Research
If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting tools they offer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. <b>Between 74%-89% of retail investor accounts lose money when trading CFDs.</b> You should consider whether you can afford to take the high risk of losing your money.
Learn more about technical analysis charting concepts and strategies including:
- Time Series Forecast
- Typical Price Moving Average
- Standard Error Bands
- Market Thrust
- Adaptive Market Averages
- Average Directional Movement
If you’d like to see a guide on how to trade commodities, see our introduction to commodity trading, or our other specific guides on instruments like CFDs, options, stocks, bullion, forex, and cryptocurrencies.