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Advance/Decline Ratio (ADR) Definition

What is Advance/Decrease Ratio (ADR)?

The advance-decline ratio (ADR) is a popular indicator of market breadth used in technical analysis. It compares the number of stocks that closed higher with the number of stocks that closed lower compared to the previous day. closing price. To calculate the advance-decline ratio, divide the number of advancing stocks by the number of declining stocks.

Key points to remember

  • The advance-decline ratio is a technical analysis tool that helps traders determine potential trends, existing trends, and the reversal of those trends.
  • The advance-decline ratio is the number of advancing stocks divided by the number of declining stocks.
  • The advance-decline ratio can be calculated for different periods of time, such as a day, a week, or a month.
  • On a stand-alone basis, the advance-dip ratio can reveal whether the market is overbought or oversold.
  • Examining the trend of the advance-to-decline ratio can reveal whether the market is in a bullish or bearish trend.

How Advance/Decrease Ratio (ADR) Works

Investors can compare the moving average from the advance-decline ratio (ADR) to the performance of a market index such as the NYSE Where Nasdaq to see if a minority of companies are driving overall market performance. This comparison can provide perspective on the cause of an apparent rally or sell-off. Additionally, a low lead-down ratio may indicate an oversold market, while a high lead-down ratio may indicate an overbought market. Thus, the advance-decline ratio can provide a signal that the market is about to change direction.

For technical analysis strategies, recognizing the change in direction is critical to success. The advance-decline ratio is an effective value to help traders quickly get an idea of ​​potential trends or the reversal of existing trends.

As a stand-alone metric, the advance-to-draw ratio offers little more than the level of advances to declines, but when combined with other complementary metrics, powerful financial analysis can emerge. Negotiating solely on the advance-decline ratio would be rare in practice.

The advance-decline ratio can be calculated for different periods of time, such as a day, a week, or a month. Analysts and traders both like this metric because it’s presented as a handy ratio; which is much easier than working with absolute values ​​(like the mouthful when you tell a client: 15 stocks ended up while 8 fell in the day).

Types of Advance/Decrease Ratios (ADR)

There are two ways to use advance-decline ratios. One is a standalone number and the other looks at the trend of the ratio. On a stand-alone basis, the advance-dip ratio will help reveal whether the market is overbought or oversold. Examining the trend of the ratio helps to determine if the market is in a bullish or bearish trend.

A high lead-fall ratio on a stand-alone basis can signal an overbought market, while a low ratio signifies an oversold market. Meanwhile, a steadily increasing ratio could signal an uptrend, and the opposite would indicate a downtrend.

Example of advance/decline ratio

The Wall Street Journal compiles the number of stocks that rose and fell each day for major indices. For example, for December 31, 2020, the number of stocks in the New York Stock Exchange index that rose was 1,881 and the number that fell was 1,268. Thus, the advance-decline ratio for the NYSE was 1.48. For context, the previous week there were 1,894 advances versus 1,212 declines for the NYSE, giving an advance-to-decline ratio of 1.56.

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