What Is the 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.
Key Takeaways
- The advance-decline ratio is a technical analysis tool that helps traders determine potential trends, existing trends and the reversal of such trends.
- The advance-decline ratio is the number of advancing shares divided 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.
- On a standalone basis, the advance-decline ratio may reveal whether the market is overbought or oversold.
- Looking at the trend of the advance-decline ratio can reveal whether the market is in a bullish or bearish trend.
How the Advance/Decline Ratio (ADR) Works
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 a minority of companies is driving overall market performance. 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.
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 mouthfull when telling a client: 15 stocks ended higher while 8 declined on the day).
Types of Advance/Decline Ratios (ADR)
There are two ways to use advance-decline ratios. One is as a standalone number and the other is looking at the trend of the ratio. On a standalone basis, the advance-decline ratio will help reveal whether the market is overbought or oversold. Looking at the trend of the ratio helps determine whether the market is in a bullish or bearish trend.
A high advance-decline ratio on a standalone basis might signal an overbought market, while a low ratio means an oversold market. Meanwhile, a steadily increasing ratio might signal a bullish trend, and the opposite would indicate a bearish trend.
Example of an Advance/Decline Ratio
The Wall Street Journal puts together the number of stocks that advanced and declined each day for major indices. For example, for Dec. 31, 2020, the number of stocks in the New York Stock Exchange index that advanced was 1,881 and the number that declined was 1,268. Thus, the advance-decline ratio for the NYSE was 1.48. For context, the week prior there were 1,894 advancers versus 1,212 decliners for the NYSE, yielding an advance-decline ratio of 1.56.
