The advance decline ratio is a market breadth indicator used in technical analysis. When compared with an index or multiple stocks, the indicator shows you the number of stocks that closed lower than the previous days closing prices. When used on a single index, it uses the same formula for calculations except on an individual scale.
An example chart showing the ADR is provided below for BTC/USD.
How to read the Advance-Decline Ratio (ADR)
When the ADR is mapped for an individual index, the ratio shows you the market breadth as the number of advances versus declines.
When combined with other indicators such as the relative strength index (RSI), oversold and overbought conditions can be more readily seen using the ADR. A market could be considered to be overbought at high readings of the ADR and oversold when the ADR at low readings. It’s during these high and low readings that the ADR becomes most useful.
A high or low reading on the ADR could signal an impending reversal of the current trend, especially if that signal is confirmed by volume and an appropriate RSI reading.
Combining with other indicators
Besides the RSI, it’s wise to combine the ADR with other uncorrelated indicators that touch on an index’s volatility, momentum, money flow, and general direction.
For momentum, the MACD can be used to spot potential turning points. While Bollinger Bands can be used to set entry and exit points as well as to visualize the volatility in the marketplace. Volume can be visualized through the accumulation distribution line or on-balance volume (OBV).
In short, the ADR has limited usefulness when used as a standalone indicator. It is therefore recommended to not base one’s entire trading strategy around this indicator alone and instead look to other tools in technical analysis for confirmation of a buy or sell signal.