Education / Indicators / Advance/Decline Ratio

The Advance Decline Ratio shows whether the majority of stocks have an increase or decrease in price on a given day. The advantage of the Ratio is that it remains constant regardless of the number of issues that are traded on the New York Stock Exchange (which has steadily increased).

A moving average of the A/D Ratio is often used as an overbought/oversold indicator. The higher the value, the more "excessive" the rally and the more likely a correction. Likewise, low readings imply an oversold market and suggest a technical rally. This market breadth indicator shows overall trends in the market -- an advance decline ratio curve which stays above 100% indicates that the market is trending upward and a curve which stays below 100% indicates the opposite trend. However markets that appear to be extremely overbought or oversold may stay that way for some time. When investing using overbought and oversold indicators, it is wise to wait for the prices to confirm your belief that a change is due before placing your trades.

The Advance Decline Ratio is constructed by calculating the daily ratio of the number of stocks with increasing prices (advancers) to the number stocks with decreasing prices (decliners). The 'universe' of stocks for this ratio is the entire stock database which has traded on a given day. The A/D Ratio is calculated by dividing the number of stocks that advanced in price for the day by the number of stocks that declined.

A moving average of the A/D Ratio is used to show overbought or oversold markets. High readings (>1.25) indicate an oversold market that is likely to rally. Low readings (<0.9) indicate an overbought market that is likely to correct. However, since markets can stay overbought or oversold for some time, look for the prices to confirm a move before trading.