The Advance-Decline Line Indicator For Binary Options Review
The Advance-Decline line indicator, abbreviated AD line, is a so called breadth indicator based on a mathematical equation that measures market movements. Leonard Ayres was the first to calculate and analyze stocks using the AD line back in 1926 but it wasn’t until the 1960s that this breadth indicator became fully known. A breadth indicator can help traders identify up and downtrends, neutral markets as well as trend strengths in stocks. There are of course many different types of breadth indicators, Chaikin Oscillator, Volume Ratio and Arms Index just to name a few but I wonder if the AD line will take our “breadth” away? One note, this should not be confused with Accumulation/Distribution indicators, also known as AD lines.
What is the Advance-Decline Line Indicator?
The first thing you need to know is that the AD line is a breadth indicator, it was created for analyzing the performance of the underlying market, not individual stocks. The breadth measures whether the market price is increasing, decreasing or remaining neutral based on the number of stocks that are rising or falling. When more stocks close with higher prices the AD line rises, when more stocks close with lower prices the AD line falls. The AD line itself is calculated using the following formula taken from Investopedia.com:
The results from the formula above are then plotted as a line on the charts. When the line rises you will notice that the price is also in an uptrend and when the line is falling the price is in a downtrend.
A divergence can also occur, in which case the AD line moves in the opposite direction of the price.
The image below illustrates how this indicator looks on a chart. The basic signal is as follows; if the AD line is rising, or trending higher, while the market is rising or trending higher there is strength in the market. If divergence occurs the market is weak.
Image source: http://forex-indicators.net/advance-decline-line
Notice the AD line is climbing with the price and created a small “dip” when price was in a
slightly lower low.
Unfortunately, the AD line does not always show you a correct and clear analysis as in the example above. One such scenario can occur when this indicator is plotted on the asset NASDAQ. During some periods the AD line can be falling while the market is strongly moving upwards or vice versa – not to be confused with divergence! This happens because the NASDAQ consists of many different industries, one company might be performing well while others aren’t.
Installation For MT4 Users
This indicator has to be manually downloaded and pasted into the MetaTrader 4\MQL4\Indicators folder. It was quite difficult to find it so I have attached it below, at the end of this article.
Why Does the Advance-Decline Line Indicator Suck?
This indicator sucks because it only measures the strength of the underlying market, not the stock itself. It also sucks because it should only be used for trading stocks and preferably on longer time frames. These two facts are both big drawbacks for most binary options traders, and as I mentioned earlier, there are times when the ADL tricks you into thinking a stock is performing well when it is doing the opposite – or the other way around.
Why Doesn’t the Advance-Decline Line Indicator Suck?
The indicator doesn’t suck because it shows the strength of the underlying market. It measures the relationship between stocks that are advancing and those that are declining, revealing direction of the trend of the entire market. And it has the potential of revealing trend reversals too. It sucks for giving individual signals but it can help stock traders find assets that are performing well so it can be added as a complementary indicator to your strategy.
Conclusion – Does ADL Take My “Breadth” Away?
To be honest I am not that impressed so my breath wasn’t taken anywhere. There are many other indicators based on breadth that do a better job and I personally think moving averages are better for trend identification. What scares me the most is the part about the ADL sometimes showing you the exact opposite of what is actually going on with a stock. For this reason, I don’t recommend using this indicator alone but if you still want to try it make sure you get signal confirmation from another source. On the plus side, there are many other types of breadth indicators to choose from so if you really think you need one, you can read about the Force Index indicator, a great tool for short term traders.