What is Breadth of Market theory?

 Breadth of market theory:

It helps to understand the rise and fall in the prices of major indexes or stocks. It is a technical analysis tool which helps to know the market strength with the help of breadth indicators by using total number of stocks in market to know the stock prices rises or fall in a trading day. Breadth of market rises if the stock prices fall but the major indexes rise.

  With the help of breadth of market indicators investors can easily predict the market growth or rise or fall in stocks. It indicates how much stocks advances in respect of decline stocks in market or how much stock volume advances in respect of decline in stock volume in a day.

 There are two methods which help to measure the breadth of market:

·        A/D ratio (Advances/Decline ratio)

·        A/D Line (Advances/Declines Line)

Both the methods are calculated on daily basis. Advances/Decline ratio tells the investors to invest in the market or not.  If A/D ratio is less than 1 it means market is bearish and if the ratio is more than 1 it means market is bearish.

 A/D Line is the difference between advancing and declining issues and after that adds that result with previous values. The A/D line shows upward movement but price of indexes moves downward it means bullish divergence and if A/D line show downward movement but prices of the indexes are goes upward it means it is a bearish divergence (divergence means price moves opposite to A/D line indicators result.

Formula:

 A/D ratio (Advances/Decline ratio) = Number of Advances Stocks/ Number of Declines Stocks

A/D line (Advances/Decline line) = Net advances + Previous advances

Previous advances = + previous advances, -previous advances

Net advances = Difference between higher advances value with lower declines value

Example: Mr. Mehta wants to know the stocks prices are declining or rising in near future with the help of given information of different stocks values. Find out the advances and decline ratio.

Name of Stocks	Closing value of per stocks
XY	2.36
PQ	5.69
MN	4.36
CD	-5.36
TR	1.25
KL	-2.88

Solution:

There are 6 stocks in which 2 stocks that is CD and KL stock show negative values or decline in values -5.36 and -2.88 respectively.

So, the number of stocks advances is 4 and,

Number of stocks declines is 2

A/D ratio (Advances/Decline ratio) = Number of Advances Stocks/ Number of Declines Stocks

= 4/2

= 2

A/D ratio is 2 which show that the market is bearish. It means the stocks values rise in near future.

Example: Find out the A/D line with the help of given information:

PQR stocks	Advances	Declines
1/12/2019	1952	1725
2/12/2019	1245	1159
3/12/2019	562	689
4/12/2019	789	645
5/12/2019	2456	2000
6/12/2019	288	102

Solutions:

PQR stocks	Advances	Declines	Net advances	A/D line
1/12/2019	1952	1725	707	707
2/12/2019	1245	1359	-114	593
3/12/2019	562	689	-127	466
4/12/2019	789	645	144	610
5/12/2019	2456	2000	456	1, 066
6/12/2019	288	380	-92	974

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