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Advance / Decline Ratio (A/D Ratio)

Moneyzine Editor
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Moneyzine Editor
1 mins
January 4th, 2024
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Advance / Decline Ratio (A/D Ratio)

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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