The Advance-Decline Line Chart: Definition & Uses

Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

The overall state of the stock market can be seen with the advance-decline chart. This lesson will define the chart and describe real-world uses for analyzing the chart.

What Is Advance-Decline?

Predicting the stock market is a huge part of big business. Because of that, analysts are going to use a wide range of tools to analyze data. One of these tools is the advance-decline chart. In its most basic form, the chart shows the number of stocks that closed higher than a previous day (or date range), minus the number of stocks that closed lower.

AD Line (Previous Value) + Net Advances (Current Value)

AD Data for chart

The line shape depends on where you start calculating. We have to start somewhere, so we can start at the net advances for the first day of reporting (in our example, let's say 4/1). We next calculate the advances from the previous day and add them to our the current day.

You might notice that we're really subtracting the value if it's negative. As long as net advances is positive, the value will be added; if it's a negative number it will be subtracted. It can be pretty strange to think of net advances as a negative number, but it keeps the chart and data set less complicated.

Now that we've got that data, we can create the chart. For analyzing this chart, the numbers are not as important as the shape of the line. We're looking at trends, after all. The following chart graphically represents our data.

Example of ad line chart

When you look at this, you see a trend downward, right? But, there's one more trend line we can add: that's the actual market values for the time period. Based on both lines, we can see that the market is keeping pretty good pace with the AD line; as we'll discuss further, this indicates a fairly balanced/healthy market.

An adline with market
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Granted, we're only really looking at a very small slice of data. Depending on the type of analysis, you may find it necessary to generate AD lines for much longer time frames. For a shorter-term prediction, however, a month or 6 weeks may suffice. It really just depends on what you're trying to predict. The AD line is another tool in the toolbox.

Let's look at some uses for the AD line.

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