Advance/Decline Index

What Is the Advance/Decline Index?

The advance/decline index is a market breadth indicator that addresses the cumulative difference between the number of advancing and declining stocks inside a given index. A rising A/D index value proposes that the market is gaining momentum, whereas a falling value recommends that the market may be losing momentum.

The advance/decline Index is also called the advance/decline line or the A/D index or line. It is used to assist with affirming the current stock index trend, or can forewarn of stock index reversals when the A/D index diverges with the stock index direction. This indicator can be calculated in any time period however is calculated primarily from daily statistics.

The Formula for the Advance/Decline Index is:
$\begin &\text{Advance/Decline Index} = \text{(Advances}-\text{Declines)} + \text\ &\textbf\ &\text = \text\ &\text\ &\text = \text\ &\text\ &\text=\text \end$

Instructions to Calculate the Daily Advance/Decline Index

1. Tally the number of advancing stocks at the end of the trading session.
2. Tally the number of declining stocks at the end of the trading session.
3. Subtract the declines from the advances.
4. Assuming that step three is negative, deducted the number from the Prior Index Value. Assuming step three is positive, add it to the Prior Index Value.
5. While calculating interestingly, utilize the value from step three just (since there is no Prior Index Value). This is then used as the Prior Index Value on the next trading day.
6. Repeat steps one through four daily.

What Does the Advance/Decline Index Tell You?

Rising advance/decline index values are frequently used to affirm the likelihood that an upward trend in the stock index will proceed. On the off chance that the stock index is rising, yet there are more declining issues than advancing issues — A/D index is falling — it's usually a sign that the stock index is losing its breadth and may be preparing to move lower.

The A/D index also tends to fall when the stock index is falling. This makes sense because a stock index will decline when a larger number of stocks are falling than rising.

At the point when the A/D index is rising while the stock index is falling, this is called bullish divergence and could be an indication that the stock index will start to head higher soon. A greater number of stocks are starting to rise than fall, so the stock index will probably before long rise as well.

While the indicator provides a clue that a reversal may be coming, most traders utilize the advance/decline index related to other technical indicators or chart patterns to generate a specific trading signal with more precision. The A/D index doesn't provide buy or sell signals all alone. Rather, it gives a broad viewpoint on the health of the stock index.

Imagine that the advance/decline index on the S&P 500 is currently at 1835. On the off chance that at the end of the last trading day, 300 stocks were up (advance) and 200 were down (decline), 100 would be added to the advance/decline index value, pushing it to 1935.

Example of the Advance/Decline Index

The A/D line is typically plotted above or below a stock index chart.

In the example above, starting in November the S&P 500 rose, as did the A/D index. At the point when the A/D index broke below its rising trendline, the stock index also fell.

The Difference Between the Advance/Decline Index and the Arms Index (TRIN)

The A/D index is a cumulative index that measures the number of net advancing stocks. The Arms Index, or TRIN, is another breadth indicator yet it includes volume. TRIN takes a gander at the ratio of advancing stocks to the ratio of advancing volume. These indicators are utilizing different information sources so they can be used related to each other to assist with assessing the overall health of the stock index.

Limitations of Using the Advance/Decline Index

The A/D index may fall for extended periods of time, even while a Nasdaq- related stock index is rising. The Nasdaq tends to have more speculative stocks than the New York Stock Exchange (NYSE), for example. Those speculative stocks are bound to fail or be delisted. Before they do, they drag down the A/D index and their negative impact remains, even however the stocks that are currently listed on the exchange may be doing great and rising.

The A/D index will not always forewarn of reversals. Frequently it just basically moves in the same pattern as price. Divergence is absent at each reversal of the stock index.

The A/D line may also provide contradictory messages in some cases, even however the trend inside the stock index remains. Or on the other hand the A/D line may strongly trend, yet the stock index direction doesn't follow suit as expected.

Features

• A rising A/D index affirms a rising stock index and shows strength because a larger number of stocks are rising than falling.
• A falling stock index with a rising A/D line is bullish divergence and indicates the stock market could rise as additional stocks are starting to climb.
• A rising stock index with a falling advance/decline is a bearish divergence and indicates that the stock market rise is losing steam since less stocks are participating in the rise.
• A falling A/D index affirms a falling stock index. This shows weakness because a larger number of stocks are falling than rising.