DEFINITION of The Advance-Decline Line (AD Line)
AD line – Advances, and declines refer to the number of stocks that closed at a higher and lower price than the previous day, respectively.
WHAT IT IS IN ESSENCE
AD Line is a breadth indicator based on Net Advances. That is the number of advancing stocks less the number of declining stocks. Net Advances is positive when advances exceed declines. And negative when declines exceed advances. The advance-decline line is a cumulative measure of Net Advances. It rises when Net Advances is positive and falls when Net Advances is negative.
The Advance-Decline Index Line or AD Line is an indicator used in the technical analysis of the stock markets. The Advance-Decline Index line belongs to the family of market breadth indicators. You can use them to measure the market volatility by focusing on how the stocks at an exchange are behaving.
The Advance-Decline line
It measures the net stock advances. They are derived from the number of advancing stocks less the number of declining stocks. One note, net advances rise when there are more advancing stocks. Contrary, the net declines are high when there are more declining stocks.
This signals when the overall market sentiment is bullish or bearish.
Combining this information, the Advance-Decline Line is a cumulative measure of the net advances or declines. The Advance-Decline line is based on the theory which uses the number of advancing or declining stocks to determine whether one should buy or sell a security.
HOW TO USE
Technical analysts look at advances and decline to analyze stock market behavior, discern volatility, and predict whether a price trend is likely to continue or reverse.
Chartists can use Net Advances to plot the advance-decline line for the index and compare it to the performance of the actual index. The AD Line should confirm an advance or a decline with similar movements. Bullish or bearish divergences in the advance-decline line signal a change in participation that could foreshadow a reversal.