Studying Breadth of the Market

Market Breadth – ADS (Advance, Decline, Same) feature in TrueData Cheetah is similar to breadth indicator. Breadth indicator measures the number of advancing and declining stocks using a mathematical formula. It reflects the market sentiments. Looking at  ADS,  a trader would get an idea about how a market is performing. It also has a third line ‘Same line’ which shows the percentage of stocks which are neither advancing nor declining, it shows stock with no % change in their close price.

Advance-Decline line can be better understood by studying convergence and divergence:-

Convergence

Convergence

Bullish- when advance line converge towards decline line from bottom to above, then it’s a bullish convergence. It generally shows signs of trend reversal in the market from bearish to bullish.

Bearish – when advance line crosses the decline line by moving down, it leads to bearish convergence.  This typically indicates a bearish reversal in the market.

Divergence

Divergence

After convergence, ADS forming new highs or new lows. This can be used to identify a trend where fewer stocks are declining and the decline in the index may be nearing an end. Thus a trader can identify a stock in a group by using ‘% chg’  for trading.

Similar trading pattern could be followed in Bearish divergence.

Ratio

Ratio

A/D ratio if above 1.25 shows a bullish trend in the market whereas if below indicates a bearish trend, if A/D ratio is between 0 and 1, this indicates bearish to choppy market. Using  A/A+D formula shows a strong bullish trend if above 0.60 or bearish trend if below 0.50.

This TrueData Cheetah feature is therefore significant while trading as it gives you an overall view of the market.

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