Advance / Decline Line
From FXPedia
The Advance / Decline Line (A/D Line) is a technical analysis tool that market analysts use to gauge the overall movement of a market. While stock market indices consider only a limited number of stocks – the Dow Jones Industrial Average for instance is based on only thirty stocks – the A/D Line provides feedback on the market as a whole.
An A/D Line is a ratio that compares stocks rising in price (the “advancers”) with those losing (the “decliners”). In a bull market (i.e. prices are rising), the number of advancers outpace the decliners – conversely, if prices are falling in a bear market, the number of decliners is greater than the advancers.
How to Read an A/D Line Chart
There are many ways that an A/D Line chart can be displayed but all versions are simply a running total of the number advancing stocks, minus the number of declining stocks. Each point along the A/D Line is determined by taking the difference between the number advancing and declining stocks for the time period, and adding the result of this calculation to the difference between advancers and decliners for the previous period. If you were to write out the formula, it would appear as follows:
- A/D Line = (number of advancing stocks – number of declining stocks ) + A/D Line for previous period
The shape of the A/D Line provides direct feedback on market direction. The steeper the curve upwards, the more aggressively advancers lead decliners, while an A/D Line that slopes downwards indicates that decliners outnumber the advancers.
The A/D Line can also help determine if a market trend is in the process of reversing. This is apparent when markets are still in the positive territory, but the A/D Line slopes downwards - this tells you decliners are beginning to lead the advancers and if conditions continue, an overall market reversal is imminent.
Related Links
- An Introduction to Technical Analysis
- Ask Price, Average Price, and Bid Price Line Charts
- Fibonacci Retracements
- Advance / Decline Line
- Oscillators
- Technical Analysis vs. Fundamental Analysis
