Advance/Decline Ratio

Definition

The advance decline ratio shows the number of stocks that closed higher compared to the number of stocks that closed lower. This ratio is calculated using the prior day’s closing prices. The ratio is used to analyze market breadth and determine how strong the market is as a whole.

Calculations

The advance decline ratio is calculated by dividing the number of stocks that are advancing  by the number of stocks that are declining.

Takeaways

When using the advance decline ratio, keep in mind that it rises when stocks are advancing faster than stocks  that are  declining, and the ratio falls when declining stocks  are reported to have exceeded advances. 

A historically low advance decline ratio potentially shows a market that is oversold, whereas a high advance decline ratio points towards a market that is potentially overbought. The advance decline ratio can be calculated for a variety of time periods, including one day, week, or month. 

What to look for

1. There’s more than just one way to use the advance decline ratio. Let’s explore the options below.
2. Use the advance decline ratio to determine the market’s status and find out whether or not it is overbought or oversold.
3. Look at the overall trend of the ratio and use this information to help you determine whether or not the market is showing a bearish or bullish trend. A steadily increasing / decreasing ratio would signal the status of the trend.

Summary

To sum up, the advance decline ratio is a technical analysis indicator that helps traders determine overall trends, potential trends, and the possible reversal of trends that might impact the entire market. This tool can help identify the status of the market and whether or not it is bullish or bearish in nature.