The advance decline line ratio is defined as the ratio of advancing issues to the declining issues. This ratio is quite similar to advance/decline line, but the only difference here is instead of reducing the advance and decline issues, it divides the two inputs. The major benefit of using this ratio is, it is a fixed number v/s advance decline line which goes higher with the arrival of new stocks.
Advance decline line is nothing but the breadth indicator which reflects the total number of advancing stocks less than the declining stocks in order to give indication as participation of the securities in a broader index. This line is considered as positive and then moves with the increase in the advance lines than those in the decline lines and vice-versa is also applicable. When it is compared with the AD line index, then it should confirm similar movements that too in the same direction along with some failure to accomplish momentum divergence as well as high lighting the reversal risk.
There are two steps involved in computing advance decline line indicator-
- Subtract advancing issues from the declining issues every day. The final result is considered to be the net advancing issues and it is a negative number.
- Add the difference to the cumulative total of the regular net advancing issues. This in turn leads to the continous formation of line which rises and falls with the latest trends in the breadth.