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 53.00%-83.00% of retail investor accounts lose money when trading CFDs.</b> You should consider whether you understand how CFDs work and 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.
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