January 31, 2016

The ADR indicator, or Advance/Decline Ratio is a technical tool taken from the stock market. It refers to the ratio of number of advancing issues to the number of declining issues. Therefore, ADR function determines the strength of a prevailing trend in the market, or more simply, calculates the market breadth. Let’s first understand how this technical tool is built and calculated. Once we do so, I will show how you can interpret it and use it to improve your trading decisions and generate signals.

## Calculation of Advance Decline Ratio.

The Advance/Decline Ratio is computed by dividing the total number of advancing issues for the day by the total number of issues that declined. So, ADR = (Advancing Issues) / (Declining Issues).

In Forex, and other type of currency trading, the ADR indicator is calculated in a similar way. Only it calculates the number of advancing bars (candles) on the chart compared to the declining bars. The result is then usually smoothed by a simple MA with the purpose to avoid intraday fluctuations. Therefore it’s better reflect long term trends.
It looks a bit like the ADL (Advance-decline line). The main difference is the display, while the ADR can never be negative figure due to the division action of its calculation. Also, Don’t confuse it with another indicator the ATR – Average True Range. That, sometimes might be called ADR as well, (for Average Daily Range).

The Advance/Decline Ratio essentially refers to the market breadth, and determines the momentum of the market. If the market has more issues that are advancing than the number of that are declining, then the ADR remains above 1. Similarly, if the number of declining issues is more than that of inclining issues, then an ADR value less than 1 is generated. When we use it on our Forex chart, the traded asset is our “market”. We evaluate its momentum in relate to its recent performance. The main thing ADR value helps you to determine is whether a currency pair, or another asset is trading in an overbought region is oversold. Extremely low values indicate that the market is in an oversold region, and an upward movement is expected to take place. While a higher value suggests that the market is becoming over-bought, and that a sell-off will occur in the near future, after which the prices will drop lower. Here is what you should know:

• The further the indicator move from the 1 level, the higher the ADR value and the more stable the existing trend is.
• The closer the ADR indicator reading to 1 level the less reliable the current trend.
• When the ADR indicator is rising and the price is rising as well you know the trend is healthy and is expected to proceed.
• When the ADR is declining and the price is falling as well you also have a stable trend which is expected to go on.
• A  divergence suggest a change in the prevailing trend. As you can see in the image above, it may happen when the price is declining but the ADR indicator is rising at the same time. it indicates a weakening and a possible reversal from the current trend. Same thing in case that the price is rising and the indicator is falling.
• When the ADR is crossing the 1 level to the upside you know that an up-trend has been now established.
• When the ADR is crossing the 1 level from the up side to below, you know that a down-trend is now taking place.