Advance/Decline Ratio Basics
One of the indicators that give you an idea on what has happened during the trading day is market indexes. Another indicator is advance/decline ratio.
Since market indexes represent a group of stocks, they don't present the whole picture of the trading day and the performance of the market during this day.
On the other hand, if you want to consider the individual performance of particular stocks, you should use advance/decline numbers. It groups stocks in three categories according to the movement of the price of the stock. The groups are advanced, declined and remained unchanged. The advance and decline numbers are calculated on the basis of the prices from the previous day's close.
We should concentrate our attention to the declined and advanced numbers. These two indicators give you an idea on the overall performance of the market. Additionally, you become familiar with the breadth of the market, not just the individual performance of the stocks.
Advance/decline numbers are usually reported as a ratio. For instance, you may hear that the advances have led the declines by 3 to 2. This should be interpreted as three-fifths of the stocks have advanced in their performance, whereas two-fifths have declined.
On the other hand, advance/decline numbers can be also reported as a percentage. Either way, no matter how useful advance/decline numbers may be in determining the performance of the market, it doesn't give exact information on the size of the declines and advances.
Advance/Decline Numbers Application
There may be cases in which an index reports a gain at the end of the trading day. This gain may be caused by an increase in a certain number of stocks. However, a significant lead by declining stocks may be observed relative to the advancing stocks.
However, these results should be interpreted as a decline in the market, no matter that the index has experienced an increase. Therefore, you should base your judgments regarding the performance of the market on the advance/decline numbers, not on the performance of a particular index no matter how broad it is.
There have been many cases in which a major increase in an index was not accompanied by an increase in the advance number. In such a case it is reasonable to conclude that by the end of the trading day the index will decline.
The reverse is also true. For instance, if there is a significant movement in the advance/decline numbers, you can expect a movement in the different indexes as well.
Additionally, a market that experiences a trend toward either a decline or an advance is highly unlikely to reverse its movement immediately on the next trading day.
Advance/decline numbers can be also used in your daily observations of the trades in order to determine whether a particular trend is a false or a spot.
Finally, use advance/decline numbers whenever you need to make a judgment on the performance of the market. These numbers can also give you understanding on the movements of the indexes.
Opening a OptionsHouse account to benefit from their low $3.95 stock trades (currently they offer 100 free trades) is a smart idea.
|Rate this article : Low||High|
- What Is Day Trading?
- Ex-Dividend Date and Record Date Explained
- Convertible Securities Definition and Types
- Closing Price Discrepancies
- Variable Annuity Contracts Explained
- Hedge Funds 101: Introduction to Hedge Fund Investing
- Investment Planning 101 – Getting Started on Investing
- Asset Allocation – Choosing the Best Allocation Strategy
- What Investors Need to Know about Financial Analysts
- What Are Financial Analysts?
- Brokerage Account Opening: Things to Do and Remember
- Understanding Mutual Companies
- Auditing Essentials
- Introduction to Microcap Stocks
- Understanding Trade Execution
- SEC Order-Handling Rules
- Understanding Margin Calls
- Stock Market Day Trading
- How to Read Stock Tables
- Understanding After-Hours Trading
- Why Do Companies Go Public
- Price to Sales Ratio (PSR) Explanation
- Price to Earnings (P/E) Ratio Basics
- Price to Earnings Growth Ratio (PEG) Explanation
- Understanding Inventory Turnover Ratio
- Understanding Return on Equity and Return on Assets
- Price/Book Value Advantages and Disadvantages
- Importance of Current Assets and Current Liabilities
- Technical Analysis Basics
- Fundamental Analysis Technique Basics
- Technology Stock Characteristics
- Foreign Stock Characteristics
- Small Cap Stocks Characteristics
- Large Cap Stock Characteristics
- Stock Price Volatility
- Introduction to Stocks
- Stock Market Investing Basics
- Consumer Price Index Basics
- Option Basics and Types
- IPO Basics and Strategies
- Inverted Yield Curve Implications
- CPI Basics
- Earnings Season Basics
- Stock Market Movements
- Asset Allocation Basics
- Foreign Stocks Basics
- Rising Interest Rates and their Effects
- Value Investing Basics
- Advance Decline Ratio Basics
- Stock Price Influences
- Dividend Yield Explanation
- Book Value Explanation
- Trailing Stop Order Basics
- Stop Loss Order Fundamentals
- Newspaper and Online Stock Quotes
- Setting Stock Prices
- Stock Order Types
- Company Market Capitalization
- NYSE and Market Specialists
- Market Makers Role and Responsibilities
- Stock Trading Basics and Order Types
- Bid and Ask Prices
- Stock Share Types
- Stock Market Indexes and Fair Value Indications
- Stock Split Basics
- Stock Market Sectors Classification
- Federal Reserve Board (Fed) Functions and Importance
- Stock Market Cycles
- Stock Dividends Basics
- Stock Basics
- Stock Buyback Reasons
- Types of Brokerage Accounts
- Stock Broker Categories
- Certified Financial Planner Designations
- Financial Advisor Job Description
- Discount Stock Brokers vs Full Service Brokers
- US Treasury I Bonds Basics
- Convertible Bonds Basics
- Zero Coupon Bonds Basics
- Bond Definition and Concepts
- Stock Investing Basics
- Investment Goals Planning
- Classes of Assets - Asset Class Definition
- Mutual Funds vs Individual Stocks
- Stock Investing vs. Saving