Advance Decline Ratio (ADR)
ADR Quick Summary
Trading with ADR involves the following signals:
ADR crossing above 1.00 level — an uptrend has been established.
The further ADR moves from 1.00 level the more mature current trend is.
What is Advance Decline Ratio in Forex
Advance Decline Ratio in Forex determines a momentum in the market by comparing advancing moments to declining ones.
A/D Ratio was brought from stock trading, where traders were calculating the difference between stocks listed on the New York Stock Exchange that advanced in price minus those that declined.
Example of how it looked in stock trading:
ADR indicator Formula
The Formula for Advance Decline Ratio is:
Advance/Decline Ratio = Number of advancing moments / Number of declining moments
If ADR is less than 1 it means that there is more declining moments than advancing. If ADR is higher than 1 – advancing moments prevail.
Advancing moments - the number of bars that closed above their opening price.
How to use Advance Decline Ratio indicator
ADR indicator is used widely as a overbought / oversold indicator where extremely high reading suggest the market being overbought while extremely low readings suggest an oversold market. However, the market can remain in overbought/-sold condition for an extensive period of time, therefore an additional confirmation signal from other tools is needed to confirm a move.
Similar to all other momentum indicators the cross of 1.00 level on ADR indicator is an important signal of an established trend while the distance from this 1.00 level describes maturity of the trend.
ADR chart example
On a Forex chart Advance Decline Ratio (ADR) indicator looks more like Advance Decline Line (ADL), but in contrast to ADL, ADR cannot be negative.
How does ADR works on practice
Let’s take a down trending market. By looking at ADR traders can measure a strength and health of a current down trend. If ADR is low and decreasing during the sell off it indicates a good health of the downtrend. If, however, ADR moves higher while the trend continues down, it suggest a deteriorating strength of a trend, in other words with each downside progress fewer participants take part in driving prices down. Eventually the market is going to change the direction and move higher following ADR indicator.