The advance/decline ratio (A/D ratio) shows the ratio of advancing stocks to declining stocks. The benefit of using the advance/decline ratio is that it is a constant number,
Interpreting Advance Decline Ratio
Interpreting the advance/decline ratio can prove to be a difficult task. The ratio will move erratically and on quick glance it is a bit challenging to make clear observations about the health of the market. A popular technique is to place a moving average of the A/D ratio to assess the direction of the technical indicator. The average of the indicator will begin to oscillate back and forth and will provide clues as to whether the market is oversold or overbought. The A/D ratio will never have a negative value. Traders can use the following values for estimating the trend of the market:
- A/D ratio > 1.25 bullish
- A/D ratio is between 0 and 1, bearish to choppy market
- A/D ratio > 2 extremely bullish
The Advancing-Declining Stocks is calculated simply by subtracting the number of declining stocks from the number of advancing stocks.
The AD Line peaks out well ahead of the more widely followed market indices and averages. It provides such useful information as:
Overall market strength
Rising or falling trends
Whether the trend is intact, and
The length of the current trend
Advance/decline numbers can be also used in your daily observations of the trades in order to
determine whether a particular trend is a false or a spot.
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