Advance Decline Analysis

Advance decline technical analysis is one of the most popular types of the analysis applied to the indexes and exchanges. This type of the analysis is unique in its nature as it cannot be applied to stocks, futures, currencies and many other tradable securities that are not based on the basket of stocks or basket of securities. The advance decline data and derived from these data technical indicators are calculated from the number of declining and advancing securities (stocks) from the index or exchange listings. Furthermore, the common use of these indicators is actual when the discussion is going on about indexes and exchanges.

The common question, often aroused among novice traders, is what do you do with these data if you cannot trade directly indexes and exchanges? The answer in this question is quite simple. First of all there are many exchange traded funds (Etfs) traded on the stock market that track the performance of the indexes. As an example Spy exchange traded fund track the performance of the S&P 500 index, Dia exchange traded fund track Dow Jones Industrial index, Iwm tracks Russell 2000, Qqqq exchange traded fund tracks the performance of the Nasdaq 100 index and so on. These Etfs are traded very actively and there are not many of stocks that are more popular than these Etfs. When you trade Etfs, it is recommended to use the advance decline technical analysis of a benchmark index as an addition to the price and volume based technical analysis. The Etfs are always follow the index and never the other way around. Therefore, it is essential to have advance decline data under your hands before making a trading decision on the exchange traded funds.

The second and most important reason to analyses indexes, including advances and declines is that every trader must know the general market direction. If you lock yourself in your stock analysis only, sooner or later you will face a situation when your indicators stop working and you will be confused and you will lose money by simply not understanding that your indicators changed their behavior because the overall stock market changed its trend. Technical analysis of stocks cannot give you a picture of what is going on the market and in the economy. Only technical analysis of the indexes (including advance/decline analysis) can provide you with a clear picture of the processes that are performed on the stock market. You should always remember that while each stock is a separate entity and its trend depends on the health of the underlying public company, all of the stocks are in great dependence on the general stock market trend and on the health of the economy.

By: Viktor Ka

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Charts, quotes, technical analysis, signals for indexes and exchanges (S&P 500, Nasdaq 100, DJI, etc) are essential in options trading, trading index derivatives (QQQQ, SPY, DIA, etc), index emini futures and index tracking funds.