Technical Analysis, Studies, Indicators:
Advance Decline Volume Oscillator (AD Volume Oscillator)
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Patent #: US 7,831,984 B2
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Important: Please bear in mind that by its nature, advance decline data and indicators could be applied to a group of stocks only: market indexes, stock market exchanges, portfolios of stocks, and etc.
Description
The Advance Decline volume oscillator is widely used to assess market breadth and as an indicator for market strength. When volume of the advancing issues (stocks) outpace the volume of the declining issues (stocks), the advance-decline volume oscillator moves higher. Conversely, the A-D Volume Oscillator moves lower, when the trading volume associated with the group of declining issues outweighs volume associated with the group of advancing issues. By studying the AD volume oscillator, you can thus determine the overall health of the market.
We are the only source of advance decline indicators for U.S. indexes and exchanges on daily and intraday level which allows to use it in the S&P 500, Russell 2000 and other indexes technical analysis.
Technical Analysis, Signals, Trading Systems
In the bottom pane of the chart, you will see a green shaded area, where the advances volume exceeds the declines volume. Where the declines volume surpasses the advances volume, you will see a red shaded area. We have added a volume moving average (VMA) that outlines these areas. The VMA turns red or green depending on whether we have a positive or a negative A-D Volume Oscillator readings. Various settings for the VMA could be applied, giving an analyst the ability to determine the best fit for each particular timeframe. The VMA is one of the advantages of the A-D volume oscillator.
The A-D volume oscillator has a horizontal scale from which you can read the advances and declines volume (in billions of shares).
Chart 1. NASDAQ 100 30-day intraday (one bar = 30 min)
Advance-Decline Momentum Volume Oscillator
Chart 2. NASDAQ 100 60-day intraday (one bar = 1 hour)
Advance-Decline Momentum Volume Oscillator
In technical analysis, Advance Decline Volume Oscillator is used to define flow of the money (traders) between the group of the advancing and declining stocks. In general, technical analysis applied to the indexes is used to evaluate Market Breadth and overall market sentiment. However, the knowledge of the sentiment in a group of stocks (index) can help to make an informative decision whether to buy or sell index derivatives (ETFs, options and other trading instruments that track the performance of the indexes) also.
A simple trading system based on the Advance-Decline Volume Oscillator would be similar would be similar to a trading system based on a money flow based indicator:
- Consider selling when Advance-Decline Volume Oscillator starts to decline after hitting high levels,
- Consider buying when Advance-Decline Volume Oscillator start to move up after hitting low levels.
Chart 3: S&P 500 chart and Advance-Decline Volume Oscillator with simple technical analysis and signals.
The other strategies could be used as well. The other most common way to generate signals is to do it on the crossovers of the Advance-Decline Volume Oscillator and 0 (zero) line around which it oscillates.
Many traders prefer to keep an eye on the divergence as well:
- Positive divergence is noted when price makes new low and Advance-Decline Volume Oscillator fails to make new low - it could be a sign a possible reversal up in the near future;
- Negative divergence is noted when price makes new high and Advance Decline Volume Oscillator does not move to a new high - a sign of a possible reversal down in the near future.
Formula and Calculations
The formula for calculating the advance-decline volume oscillator is simple:
A-D Volume Oscillator = SMA(Advance Volume - Decline Volume)
The formula for calculating the advance-decline momentum volume oscillator is:
A-D Momentum Volume Oscillator = SMA(Advance Momentum Volume - Decline Momentum Volume)
Where SMA is a Simple Moving Average. In some references you may find formulas where Moving Average is applied directly to the advance and decline volumes and only after that the advance and decline volumes are used in oscillator formula:
AD Volume Oscillator = SMA(Advance Volume) - SMA(Decline Volume)
Advance Decline volume oscillator's calculation is quite similar to the AD Volume Line's calculations. The only difference is that in opposite to the AD Volume Line, AD Volume Oscillator does not carry cumulative factor. That is why in some cases (references) AD volume oscillator could be called as noncumulative AD Volume Line.
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