What is the 'Advance/Decline Line - A/D'

The advance/decline line (A/D) is a technical indicator that plots changes in the value of the advance-decline index over a specific time period. Each point on the chart is calculated by taking the difference between the number of advancing/declining issues and adding the result to the previous period's value, as shown by the following formula:

A/D Line = (# of Advancing Stocks - # of Declining Stocks) + Previous Period's A/D Line Value

BREAKING DOWN 'Advance/Decline Line - A/D'

The A/D line is used by many traders to confirm the strength of a current trend and its likelihood of reversing. The indicator essentially shows if most stocks are participating in the direction of the market. If the markets are up, but the A/D line is sloping downwards (bearish divergence), it's usually a sign that the markets are losing their breadth and may be about to reverse direction. If the slope of the A/D line is up and the market is trending upward, then the market is said to be healthy.

Conversely, if the markets are continuing to move lower and the A/D line has turned upwards (bullish divergence), it may be an indication that the sellers are losing their conviction. If the A/D line and the markets are both trending lower together, there is a greater chance that declining prices are likely to continue. To learn more, see: Divergence: The Trade Most Profitable.)

Image depicting a/d line vs. index chart example

Advance/Decline Line Limitations

Like most technical indicators, the A/D line has several quirks that traders should be aware of. The Nasdaq does not have the same stringent listing requirements as other major exchanges, which means there are more company delistings. This can cause the indicator and Nasdaq market to show a bearish divergence for a prolonged period because companies that fail continue to have a negative effect on the A/D line after they have been delisted.

The A/D line provides a better measure of how small- and mid-cap stocks are performing. This is because the majority of stocks listed on the New York Stock Exchange (NYSE) and Nasdaq fall into this category. Irrespective of a stock’s market capitalization, if it rises, it counts as +1 and if it falls is registers as -1. For example, a rise in AAR Corp. that has a market cap of $1.4 billion, has the same effect on the A/D line as a rise in Apple Inc. that has a market cap of $834 billion. (For further reading, see: What are the Listing Requirements for the Nasdaq?)

RELATED TERMS
  1. Advances And Declines

    Advances and declines refers to the number of stocks that closed ...
  2. Toraku Index

    A technical indicator that compares the number of advancing stocks ...
  3. Market Breadth

    Market breadth is a technique used in technical analysis that ...
  4. Cumulative Volume Index - CVI

    A momentum indicator that gauges the movement of funds into and ...
  5. Ease Of Movement

    The Ease of Movement technical indicator shows the relationship ...
  6. Trending Market

    A trending market is a market that is trending in a specific ...
Related Articles
  1. Trading

    3 Key Signs Of A Market Top

    Learn the best ways to foresee market corrections and how to profit from them.
  2. Trading

    Trend-Spotting With The Accumulation/Distribution Line

    The A/D line highlights buying and selling pressure to confirm existing trends.
  3. Trading

    Profiting in bear and bull markets

    There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage.
  4. Trading

    Market Breadth: A Directory Of Internal Indicators

    Discover the indicators that measure the force of the bulls and bears, telling you what a simple price chart cannot.
  5. Investing

    The top technical indicators for commodity investing

    See how traders can use "the usual suspects" standard for trend trading when it comes to choosing indicators for commodities investing.
  6. Trading

    Divergences, Momentum and Rate of Change

    Divergences can signal a change in direction, but traders must also look at the speed of change.
RELATED FAQS
  1. What are the most common market indicators to follow the European stock market and ...

    See which market indicators and major market indexes are used most frequently by traders and analysts to measure the European ... Read Answer >>
  2. What indicators help define a bull market?

    Learn about a number of various technical indicators traders and analysts use to define and confirm the existence of a bull ... Read Answer >>
  3. What are the best technical indicators to complement the Moving Average Convergence ...

    Learn the best technical indicators to use as part of a trading strategy in conjunction with the moving average convergence ... Read Answer >>
  4. How do I build a trading strategy using the Cumulative Volume Index - CVI?

    Find out how traders and analysts make use of the cumulative volume index, a technical breadth indicator, within their trading ... Read Answer >>
  5. What are the top technical indicators used for range-bound trading strategies?

    Learn how to identify when a market is range-bound and what some of the technical indicators are that work best for trading ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center