The advance decline line is a breadth indicator that is used to show the comparison between the advancing and declining of securities/stocks over a given period of time.
Being a breadth indicator, the Advance decline line helps traders to know whether the market is in an upward or downward direction thus is based on divergence.
When more stocks are advancing than declining, that will be an indication of a positive breadth thus the market will be considered to be in a bullish condition while when less stocks are advancing than declining, that will be an indication of a negative breadth thus the market will be considered to be in a bearish condition.
Advance/decline line is therefore calculated using the following formula;
AD line= (Number of advancing issues- Number of declining issues)+ previous value of AD line
Since advance-decline line is based on divergence, it, therefore, follows that when the market is trending upwards while the Advance decline line is moving downwards, the market will reverse and start moving in the same direction downwards as the advance-decline line.
On the other hand, when the market is trending downwards while the advance decline line is moving upwards, the market will reverse and start moving in the same direction upwards as the advance decline line.This is indicated as in the candle sticks chart below;
From the candle sticks chart above, there are 3 points, A, B, and C.Point A and B are divergence points while point C represents the advance-decline line.
At point A the market was trending downwards while the advance-decline line was moving upwards. The market then reverses and start moving in the same direction upwards as the advance-decline line. This will signal the trader to be trading upwards at point A.
On the other hand, at point B the market was trending upwards while the advance-decline line was moving downwards.The market will then reverse and start moving in the same direction downwards as the advance decline line. This will signal the trader to be trading downwards at point B.
Recommendation:If you are a day trader just use 1 min,5 min, 15 min, and 30 min timeframe while if you are a swing trader just use 1 hour and above timeframe if you want advance decline line indicator to work well for you
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