Definition
The term advance decline ratio refers to a measure of the stocks that are increasing in price versus those that are decreasing. The advance decline ratio is a technical indicator of the breadth of a market decline or advance.
Calculation
Advance Decline Ratio = Stocks Advancing / Stocks Declining
Note: The advance / decline ratio can be calculated for different time periods, including day, week or even month.
Explanation
Also referred to as the A/D ratio, the advance decline ratio measures the breadth of the market's movement. The ratio allows technical analysts to understand if an increase or decrease in a market index, such as the S&P 500, is driven by a few stocks or by a larger number of securities.
The A/D ratio can be interpreted in a number of ways:
A ratio that increases over time is thought to signal a bullish market trend, while a ratio that is decreasing is thought to signal a bearish trend.
A relatively high ratio can indicate an overbought market, one that is ready for a near term decline as investor sell shares to lock in their profits.
A relatively low ratio can signal an oversold market, one that is ready for a near term increase as investors purchase shares at bargain prices.
The A/D ratio will experience daily fluctuations, which is why a moving average is typically used by analysts to reveal a longer term trend.
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