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Technical Analysis, Studies, Indicators:

Advance Decline Volume (AD Volume)


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Patent #: US 7,831,984 B2
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Description: market breadth analysis, stock market sentiment, money flow, chart example, description, introduction into technical analysis.

Important: Advance Decline Volume and Advance Decline volume based technical indicators have sense and could be applied to the market indexes, stock market exchanges, portfolio's and any basket of stocks. Advance-Decline volume data cannot be applied to a single stock as by its nature AD volume data calculations are based on the group of stocks.

Advance/Decline Volume's substitute for stocks (single security) would be UDV (Up Down Volume).

Description

"Decline volume" is the running total (cumulative sum) of the number of shares traded for all those securities that belong to the declines group for a given time period. If a particular security is currently trading below its close the previous trading day, its volume is added to the total volume of the declines group.

For the definition of "advances volume", simply adapt the above explanation: "Advance Volume" is the running total (cumulative sum) of the number of shares (stocks) traded for all those securities that belong to the advances group for a given time period. If a particular security is currently trading above its close the previous trading day, its volume is added to the total volume of the advances group.

Historically, in opposite to the Advance-Decline issues (stocks) numbers, Advance-Decline volume data has become center of attention of the traders involved in the Breadth Market analysis in the late 90th. It was mainly connected with development in the computers and information technology sectors at that time when the retail and professional traders and technical analysts got an ability to utilize complex calculations in the shorter period of time.

Advances and declines volume can be analyzed using daily charts (i.e., one bar represents the trading activity of an entire day) or with intraday charts (one bar reflects the activity of 1, 5, 15, 30, or 60 minutes). The chart below shows an example of advances volume (in green) and declines volume (in red).

Chart 1.  5-day intraday (one bar = 15 min)
Cumulative Advances and Declines Volume (Cumulative AD Volume)

S&P 500 chart - advance decline volume

Looking at the charts bottom pane, you may have noticed that both the advances and the declines volume tend to increase as the trading day progresses. What we have charted here is the "cumulative advances and declines volume" ("cumulative AD volume"), a commonly accepted volume indicator among the majority of technical analysts.

What do we mean by "cumulative AD volume"? For instance, using the case of cumulative advances volume, we chart the advances volume for each completed bar, for all the stocks that presently belong to the advances group. The volume for the advances group is calculated for each completed bar, then added to the sum total of the volume of all the previous bars. For each new bar, we are summing up all the previous volume data, going all the way back to the beginning of trading that day. On a real-time intraday chart, the green line will reveal the dynamic variations that take place in the advances volume throughout the day, as they unfold.

Technical Analysis, Signals, Trading Systems

Due to its cumulative nature, it could be difficult to analyze Advance-Decline volume data on the intraday charts (see the S&P 500 chart above). Therefore, many traders prefer using technical indicators based on the Advance-Decline volume data where cumulative factor is ignored. Some of such indicators are Advance-Decline Oscillator, Advance-Decline Ratio, Advance-Decline Percentage Oscillator, and etc.

In addition, when it come to analysis of Advance-Decline volume data, you have to think about these data as a raw data - the same as open/high/low/close prices and trading volume. Many traders and professional analysts may prefer to see these raw data, yet, in most cases, technical indicators and overlays are used to make analysis easier.

Chart 2: S&P 500 chart and simplest technical indicators based on the Advance-Decline volume data.

advance decline volume indicators on the S&P 500 chart

On the S&P 500 chart above you may see raw Advance-Decline volume data smoothed by simple moving average with 20-bar period setting and some of the simplest technical indicators based on the AD volume data with the same 20-bar period setting. As you may notice, these indicators display similar picture and the main difference is in scaling:

When it comes to the technical analysis and generating trading signal, it does not really matter which one of them to use as they all move along each other. Preference could be given to one over other when you attempt to use one of them in junction with other technical indicators. As an example, if in your technical analysis, you use SMI (Stochastic Momentum Index) which oscillates around 0 (zero) in the range from minus 100% to plus 100% then you may prefer to choose AD Volume PO as it has the same scaling characteristics. It will be easier to analyze, easier to set alerts, and especially easier to set an algorithm for an automated trading system based on these two indicators.

In technical analysis Advance-decline volume data and indicators are used to analyze Market Breadth. In addition to that, since Advance-Decline volume data are dealing with trading volume, they allow to monitor Money Flow related to the Advancing and Declining stocks and generate trading signals which are based on this sentiment.

When it comes to technical analysis based on the Advance-Decline volume data and indicators you have to understand following points:

Lets take a look on the S&P 500 chart below to explain main decision making periods based on the Advance-Decline volume based technical analysis.

Chart 3: S&P 500 chart and main decision making points on AD Volume Oscillator.

advance decline volume oscillator signals on the S&P 500 chart

On the S&P 500 hourly (1 bar  1 hour) chart above we may see Advance Decline Volume Percentage Oscillator (AD Volume PO) with 20-bar period setting. We plotted the raw AD volume data with 20-bar MA applied for better understanding of processes behind the AD Volume PO as well. You may find the explanation to the points marked on the S&P 500 chart above in the table below:

Prior to the Point 1Prior to the point 1, volume in the group of the advancing stocks was increasing and volume in the group of the declining stocks was decreasing.

Traders were more interesting in the advancing stocks which is the Bullish signs and this interest was growing.

During this period our hypothetical trader supposed to be in the "Long" position.
Point 1Volume in the group of the advancing stocks started to decline and volume in the group of the declining stocks started to increase. However, volume in the group of the advancing stocks was still overpowering the volume in the group of the declining stocks.

At this moment the balance in the sentiment started to shift toward the Bears. While the Bullish sentiment remained strong, the traders started to move toward the bears (toward the bearish/declining stocks).

At this moment our hypothetical trader had to start thinking about closing the "Long" position and opening a "Short" trade.
Point 2Volume in the group of the advancing stocks continued to decline and volume in the group of the declining stocks continued to increase and this volume became bigger than the advance volume.

The Bears took over the Bulls completely - bigger part of the traders are in the Bearish stocks. In addition, traders' interest in bearish trading is growing.

At this moment our hypothetical trader supposed to be in the "Short" or in the "Cash".
Period between
point 1 and point 2
During this period our hypothetical trader have to make a decision to close his "Long" trade and to open a "Short" trade (or remain in cash).
Period between
point 2 and point 3
Volume in the group of the declining stocks continued increasing and volume in the group of the advancing stocks continued decreasing.

Traders were more interesting in the declining stocks and this interest was growing.

During this period our hypothetical trader supposed to be in the "Short" position or to remain in the "Cash".
Point 3Volume in the group of the declining stocks started to decline and volume in the group of the advanced stocks started to increase. However, volume in the group of the declining stocks was still overpowering the volume in the group of the advancing stocks.

At this moment the balance in the sentiment started to shift toward the Bulls - the interest in bullish stocks started to grow.

At this moment our hypothetical trader had to start thinking about closing the "Short" position and opening a "Long" trade.
Point 4Volume in the group of the declining stocks continued to decline and volume in the group of the advancing stocks continued to increase and this volume became bigger than the decline volume.

The Bulls took over the Bears completely - bigger part of the traders are in the Bullish stocks. In addition, traders' interest in bullish trading is growing.

At this moment our hypothetical trader supposed to be in the "Long" position.
Period between
point 3 and point 4
During this period our hypothetical trader have to make a decision to close "Short" trade and to open a "Long" trade.
Period between
point 4 and point 5
Volume in the group of the advancing stocks continued increasing and volume in the group of the declining stocks continued decreasing.

Traders were more interesting in the advancing stocks and this interest was growing.

During this period our hypothetical trader supposed to be in the "Long" position.
Point 5See point 1.

Conclusions:

In the article above we not just explained the Advance Decline volume, but, on the example of our hypothetical trader we show the processes that are behind of these data and how these data could be used to explain the market sentiment and generate signals. While the Advance Decline data could be applied to indexes only and most of the technical analysis and traders apply them to the main U.S. indexes (NYSE Composite, Russell 2000, S&P 500, DJI and Nasdaq 100) to define the overall Market Breadth and overall stock market sentiment, the same techniques could be used to trade index derivatives. A an example you may analyze the S&P 500 index and trade SPY stock, you may analyze the Russell 2000 index and trade IWM stock, you may analyze DJI index and trade DIA stocks, you may analyze Nasdaq 100 index and trade QQQ stocks, and etc. All of these stocks follow their benchmark indexes and not the other way around.

Formula and Calculations

To calculate Advance Decline Volume you need to have the list of stock listed in an index basket. Then you have to define for each stock whether it is traded above or below the previous day close.

If a stock is traded above the previous day close then it is considered as an advanced stock and total daily volume of this stock is considered as advanced volume.
If a stock is traded below the previous day close then it is considered as a declined stock and total daily volume of this stock is considered as declined volume.

if Close > Previous Day Close then Volume = Advanced Volume
if Close < Previous Day Close then Volume = Declined Volume


When all stocks for an index's basked are classified as either advanced or declined or unchanged, then Simple Moving Average (SMA) is applied to the sum of volumes of all Advanced and sum of volumes of all Declined stocks:

Advanced Volume = SMA (sum of volumes of all Advanced stocks)
Declined Volume = SMA (sum of volumes of all Declined stocks)

Victor Kalitowski

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