DEFINITION of Advance/Decline Ratio- ADR
The advance decline ratio (ADR) is a popular market-breadth indicator used in technical analysis. It compares the number of stocks that closed higher against the number of stocks that closed lower than their previous day's closing prices. To calculate the advance-decline ratio, divide the number of advancing shares by the number of declining shares. The advance-decline ratio can be calculated for various time periods, such as one day, one week or one month. Analysts and traders both like the measure because it's stated in a convenient ratio form; which is far easier than working with absolute values (such as the mouth full when telling a client: 15 stocks ended higher while 8 declined on the day).
BREAKING DOWN Advance/Decline Ratio- ADR
Investors can compare the moving average of the advance decline ratio (ADR) to the performance of a market index such as the NYSE or Nasdaq to see whether overall market performance is being driven by a minority of companies. This comparison can provide perspective on the cause of an apparent rally or sell-off. Also, a low advance-decline ratio can indicate an oversold market, while a high advance-decline ratio can indicate an overbought market. Thus, the advance-decline ratio can provide a signal that the market is about to change directions.
For technical analysis strategies, recognizing directional change is essential to success. The advance-decline ratio is an effective value to help traders quickly get a feel for potential trends or the reversal of existing trends.
As a stand-alone measure, the advance-decline ratio offers little more than the level of advances to declines, but when paired with other complementary metrics, powerful financial analysis can emerge. Trading solely off the advance-decline ratio would be uncommon in practice.