You may have a client who knows nothing about stocks, but they would like to know the basics to help them gather enough confidence to invest. One fun and easy way is to show them the Advance/Decline Line (A/D Line). It is a daily stock market indicator that gives a visual of stocks on the rise charted against those on the decline.
What it does
Investors use it for studying the health of the stock market as it is a cumulative indicator. It is used to confirm whether there is a likelihood a trend is about to reverse.
For instance, an A/D Line will point to a bearish divergence since indices might show an upward trajectory, yet the line will be sloping downwards. That shows the market is losing its breadth. If the indexes move lower, but the line shows an upward trajectory, that is a bullish divergence, which means sellers have lost conviction.
If both the A/D line and indexes show an upward trajectory, the market is healthy, but the opposite indicates prices are set to remain depressed for some time. (Click this link to access an economic calendar for your trading strategies )
How and when its mostly used
A positive stock leading to a positive number added to the previous number, while a negative is subtracted from the previous. As such, when the stock market is doing well, the slope will show an upward trajectory. If it’s on the decline, the indicator will face downwards.
One use scenario is the effect large stocks have on capitalization stock market indices. Since such indices only reflect a group of stocks, an A/D Line indicator will give a clearer picture since it shows how individual stocks perform.
Advance/Decline Line Indicator | Indicator Series Click To TweetComparison with TRIN indicator
The Arms Index (TRIN) plots shorter-term indicators by measuring the ratios of advancing stocks to advancing volume, while the A/D line gives a longer time indication of the direction of stocks.
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