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?)

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