Volume Tutorial:
Advance/Decline
Indicators.
Advance-decline
indicators can be used for trading against broad market indices through
options, futures, and mutual funds. They can also be used to increase the
effectiveness of more specific signals by adding confirmations or warnings
of upcoming trends.
Each day the breadth of the
market can be measured by the number of declining and advancing issues
(stocks):
Advance-Decline Line
The Advancing/Declining Issues indicator
represents the total difference between advancing and declining issues. The advance/decline line is considered
one of the best indicators of market
movement as a whole. A large positive number indicates a
strong day, while a negative result represents a weak day.
The advance/decline line is one of the
most widely used measure of market breadth. It can be used as a measure of
market strength as it moves higher when there are more advancing issues than
declining issues. It moves lower when there are more declining issues than
advancing issues. By studying the advance-decline line you can see if the market
is in a rising or falling cycle. A value above zero is generated when more
stocks are advancing (increasing in price) than declining. A value below zero is
generated when more stocks are decreasing in price. This indicator could be a
good overbought/oversold indicator for the market. Extremely high values may
indicate that the market is becoming overbought, meaning that a sell-off may
occur in the near future causing prices to drop. Likewise, extremely low values
can indicate that the market is becoming oversold.
Another way to use the advance/decline
line is to look for a divergence between an index and the line itself. Often, an
end to a bull market can be forecast when the A/D Line begins to round over
while the index is still trying to make new highs.
Advance-Decline Ratio
The advance/decline ratio is calculated
by dividing the number of stocks that advanced in price for the day by the
number of stocks that declined. The advantage of the Ratio is that it remains
constant regardless of the number of issues that are traded
A moving average of the advance/decline
ratio is often used as an overbought/oversold indicator. A high value suggests
the stock has become overbought and is due a correction to more reasonable price
levels - a low reading suggests the opposite.
The advance/decline ratio does not take
into account the size (volume) of an advance or decline and therefore is only
partially useful as a indicator. Its primary use is as a secondary measurement
on the current day's market movements.
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