Advance/Decline Index: Overview, Calculations, and Example

What Is the Advance/Decline Index?

The advance/decline index is a market breadth indicator. It represents the cumulative difference between the number of advancing and declining stocks within a given index. A rising A/D index value suggests that the market is gaining momentum; a falling value suggests that the market may be losing momentum.

The advance/decline index is also called the advance/decline line or the A/D index or line. It is used to help confirm the current stock index trend or forewarn of stock index reversals when the A/D index diverges with the stock index direction. This indicator can be calculated in any time frame but is calculated primarily from daily statistics.

How to Calculate the Daily Advance/Decline Index

The formula for the advance/decline index is:

$\begin{aligned} &\text{Advance/Decline Index} = \text{(Advances}-\text{Declines)} + \text{PIV}\\ &\textbf{where:}\\ &\text{Advances} = \text{Total number of stocks in the index that}\\ &\text{closed above their prior closing prices}\\ &\text{Declines} = \text{Total number of stocks in the index that}\\ &\text{closed below their prior closing prices}\\ &\text{PIV}=\text{Prior index value} \end{aligned}$​Advance/Decline Index=(Advances−Declines)+PIVwhere:Advances=Total number of stocks in the index thatclosed above their prior closing pricesDeclines=Total number of stocks in the index thatclosed below their prior closing pricesPIV=Prior index value​

You can use this formula to calculate the daily advance/decline index.

1. Tally the number of advancing stocks at the end of the trading session.
2. Tally the number of declining stocks at the end of the trading session.
3. Subtract the declines from the advances.
4. If step three is negative, deduct the number from the Prior Index Value (PIV). If step three is positive, add it to the PIV.
5. When calculating for the first time, use the value from step three only (since there is no PIV). This is then used as the PIV on the next trading day.
6. Repeat steps one through four daily.

What Does the Advance/Decline Index Tell You?

Rising advance/decline index values are often used to confirm the likelihood that an upward trend in the stock index will continue. If the stock index is rising but there are more declining issues than advancing issues, this means the A/D index is falling. A falling A/D index is usually a sign that the stock index is losing its breadth and may be getting ready to move lower.

The A/D index also tends to fall when the stock index is falling. This makes sense because a stock index will decline when more stocks are falling than rising.

When the A/D index is rising while the stock index is falling, this is called bullish divergence and could be a sign that the stock index will start to head higher soon. More stocks are starting to rise than fall, so the stock index will likely soon rise as well.


Example of the Advance/Decline Index

The A/D line is typically plotted above or below a stock index chart.

Imagine that the advance/decline index on the XYZ Stock Index is currently at 1835. If at the end of the last trading day, 300 stocks were up (advance) and 200 were down (decline), 100 would be added to the advance/decline index value, pushing it to 1935.


Limitations of the Advance/Decline Index

The A/D index may fall for extended periods of time, even while a Nasdaq-related stock index is rising. The Nasdaq tends to have more speculative stocks than the New York Stock Exchange (NYSE), for example. Those speculative stocks are more likely to go bankrupt or be delisted. Before they do, they drag down the A/D index and their negative impact remains, even though the stocks that are currently listed on the exchange may be doing well and rising.

The A/D index won't always forewarn of reversals. Often it just simply moves in the same pattern as price. Divergence is not present at every reversal of the stock index.

The A/D line may also provide conflicting signals sometimes, even though the trend within the stock index remains strong. Or the A/D line may strongly trend, but the stock index direction doesn't follow suit as expected.

What Is the A/D Index Vs. the Arms Index (TRIN)?

The A/D index is a cumulative index that measures the number of net advancing stocks. The Arms Index, or TRIN, is another breadth indicator but it includes volume. TRIN looks at the ratio of advancing stocks to the ratio of advancing volume. Because these indicators use different inputs, they can be used in conjunction with one another to assess the overall health of the stock index.

How Do Investors Use the Advance/Decline Index?

While the A/D Index provides a hint that a reversal may be coming, most traders use it in conjunction with other technical indicators or chart patterns to generate a specific trading signal with more precision. The A/D index doesn't provide buy or sell signals on its own. Rather, it gives a broad perspective on the health of the stock index.

What Is the A/D Line in Investing?

The A/D line is another name for the advance/decline index. It is a technical indicator that graphs the daily difference between the number of advancing stocks and the number of declining stocks in an index. A positive number is added to the previous day's number, while a negative number is subtracted from the previous day's number.

The Bottom Line

The advance/decline index, also known as the A/D index or A/D line, is a technical indicator used in stock market analysis. It plots the difference between the number of rising stocks and falling stocks in an index. If the A/D index is rising, it can confirm a strong or rising stock index. If the A/D index is falling, this can indicate a weak or falling stock index.

The behavior of the index and the A/D line can diverge. If the stock index is rising but the A/D line is falling, this shows a bearish divergence, meaning that fewer stocks are rising than on previous days and the market may be losing momentum. If the stock index is falling but the A/D line is rising, this shows a bullish divergence, indicating that more stocks in the index are beginning to rise and the market may be gaining momentum.