Online Trading Blog

Indicative Net Asset Value or iNAV or simply indicative value is the measure of net asset value of a fund or instrument according to the change in price of underlying instrument. iNAV is a powerful trading indicator especially for ETF traders and investors, as it indicate almost the price at which the ETF is trading. By definition, it is the intraday measure of per share value of an instrument based on the asset it holding and the liabilities it has.

Indicative net asset value is a more useful trading tool than Net Asset Value or NAV. With NAV or book value, the per share value of a fund is calculated based on the closing price of the underlying instrument, and it is published on morning of next trading day. But indicative value is published in more real-time, updated usually with every 15 seconds based on last transacted price of underlying instrument.

The trading price of exchange traded funds (ETFs) usually falls close to iNAV (often within a 2% range in either direction). Indicative net asset value is not so suitable indicator for mutual fund traders as there are many other costs involved in active mutual fund management.

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Bullish morning doji start pattern is one of the most reliable market reversal candlestick patterns which indicate a possible upward trend. The pattern is widely followed by all types of traders trading all financial instruments. Morning doji star formation is a three candlestick pattern, usually found at bottom of a downtrend.

The requirements of a bullish morning doji star pattern include,

• The pattern should be formed after a significant downtrend.
• The first day is a bearish day characterized by a long bearish (colored or black) candlestick.
• The second day is a doji, ideally gapped away from previous day’s candlestick.
• The third day is a bullish day characterized by a bullish (colorless or white) candlestick, ideally closing above the midpoint of first day candlestick.

Bullish morning doji star candlesticks are formed when the prices of instruments are at their lowest (oversold) positions. The bears are still in control and thus the bearish candlestick of first day. At second day there is high uncertainty in the market resulting in less trading volume and the formation of a doji candlestick. On third day bulls get the control and the market reverses for an upward trend. Although morning doji star pattern is a highly reliable one, confirmation is still suggested; which can be a bullish candlestick on fourth trading day. With this pattern, there is also a chance of formation of more than one doji stars.

Note: The gapping of doji candlestick is not a necessary requirement, especially for forex traders; as the forex market is continuous, the chance for gap formation is very rare.

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Matching systems are alternative trading systems which automatically match bids and offers to execute trades. They are widely owned by institutional traders, market makers, banks, money managers and other financial firms to create an alternative trading environment. Instead of continuous order execution, as in major exchanges, matching systems often follow periodic execution sessions.

Most matching systems allow traders to place their orders anonymously through specific protocols. The system will evaluate the order and route that to appropriate cross-matching engine, which handle order executions of specific symbols. If matching counterpart order is there, the orders are executed instantaneously. If no matching order, then the ask/bid order is displayed to all traders involved to place matching orders. Orders are usually executed on a time-priority basis.

Matching systems are often less susceptible for price manipulations 1) as trades are done anonymously and 2) as trades are done purely in a quote-driven environment. All trades are done electronically usually without broker involvement. Usually there will be minimum order size requirements (eg: 10,000 shares). Most matching systems derive ask and bid prices passively from NBBO (National Best Bid and Offer).

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The Week Ahead: U.S. stock markets are at 5 year lows coming into this week and experiencing one of the worst months on record. Buying is still on low volume suggesting that rallies are bear market traps. The Federal Reserve meets this week on Tuesday and Wednesday with a 1/2 point rate cut expected. A 3/4 point cut may help turn markets around. Other reports include: new home sales on Monday, consumer confidence on Tuesday, a widely anticipated Q3 advanced GDP number on Thursday, and personal income and spending on Friday.

Stocks to Watch: Sony Corp. (SNE) cut its full year profit guidance from $2.9 to $1.5 billion as the stock reached a 15 year low and continues in oversold territory. Timken Co. (TKR) maker of power transmission and friction management products fell to 7 year lows despite beating earnings estimates because it expects a significant drop in earnings for Q4. Hartford Financial Services Group (HIG) moved up on hopes insurance companies may be included in the $700 billion rescue plan and could be forming a double bottom.

Special Note: The lock limit down on the futures market for the Dow Industrials and S&P 500 on Friday, the first since 1997, are hinting that the major averages are preparing to break the lows set earlier this month as the Nasdaq Composite already has. Also, the Dow has yet to reach the 20 year moving average near 7700 while the S&P 500 and Nasdaq already have. A final capitulation in selling pressure that many traders desire along with lower lows probably into November could be lower than most expect. A move below 7197 on the Dow set in 2002 would mean a continuation of the bear market earlier this decade.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Interest rate parity is one of the major applications of the Law of One Price and plays a major role in forex trading markets. It links the short-term interest rates, spot exchange rates and forward exchange rates of two or more different currencies. It is a non arbitrage condition according to which the returns obtained from borrowing in a particular currency, exchanging that currency for another and investing in interest-carrying instruments in the second currency, and at the same time buying futures contracts to convert the currency back by the end of the investment period, will be equal to the returns one gets by buying and holding similar interest bearing instruments of the first currency. Whenever the theory is violated, an arbitrage opportunity is created.

There are two versions of interest rate parity known as covered interest rate parity and uncovered interest rate parity.

Covered Interest Rate Parity is also known as Interest Parity Condition. It assumes that the ‘interest rate return from different currencies will be the same if one covers against currency changes.’ That is, the returns will be the same when you invest USD in US deposits and the same dollar amount in a foreign currency, and protect that investment using a forward on the foreign currency.

Uncovered Interest Rate Parity is a condition that assumes that ‘the difference between the interest rate of two currencies will be equal to the expected depreciation of a currency.’ That is, a 10% depreciation of the USD against any foreign currency is to be compensated by a 10% rise in the interest rate of the dollar.

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There are many advantages of trading futures spreads over trading naked futures (taking simple long or short futures positions).

1. More profit opportunities and flexibility – trading futures spreads offer more opportunities as they are less volatile (compared to simple contracts), predictable and usually they follow trends.
2. Less risk – As spread trading involves taking both long and short positions, traders have almost hedged their downside risk.
3. Lower margin requirements – Most brokers offer reduced margin requirements for trading futures spreads. This allows futures traders to open larger positions with smaller accounts.
4. There are many commodities (mostly agricultural commodities) which exhibit well defined seasonal trends. Futures spread trading offer better opportunity to profit from these trends.
5. Low time requirements – As you are trading spreads, there is less requirement of following market in real-time. Spreads are better traded with end-of-the-day data.
6. Offer better opportunities to limiting risks.
7. Suitable for both experienced and novice traders.

But like trading any other financial instrument, futures spread trading involves sufficient risk and the trader should be well informed of his margin requirements, risk tolerance and his limitations; and also should be aware of various position sizing and risk minimizing strategies.

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Stars are one of the most trusted market reversal patterns. Candlesticks stars are colored (dark or bearish) or clear (white or bullish) candlesticks which fulfill following requirements.

• They have small real bodies.
• They are preceded by long bodied bullish or bearish candlesticks.
• They gap away from previous candlesticks.
• Their real-body does not over lap the previous candlesticks’ real-body.
  

There are different types of star candlesticks, which are named according to the position at which they are formed and the real-body length.

1. Morning Star candlestick: It is bearish in nature indicating an upward trend reversal. Morning star is formed at the end of a downtrend having a long bearish (colored) candle preceding and a long bullish (colorless) candle following it.
2. Evening Star candlestick: It is bullish in nature indicating a downward trend reversal. Evening star candlestick is formed at the end of an uptrend having a long bullish candle preceding and a long bearish candle following it.
3. Doji Star candlestick: It is a star candlestick that lack real-body. They can be bullish (evening doji star) or bearish (morning doji star). They are considered as one of the most reliable and easily recognizable candlestick formations.

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Call and auction markets are trading markets, where trades are carried out based on ask and bid prices. Auction markets are common markets where continuous trading of instruments is carried out by matching ask and bid prices. But call markets lack continuity and trading of instruments is carried out at pre-determined intervals (eg: at market opening, noon and market close) on ask and bid prices specified by the market.

Call markets aggregate ask and bid orders, determines ask and bid prices, and carries out all transactions at once so that the market is clear after the orders are filled. As all orders are executed at one time, call markets have increased liquidity and decreased transaction costs. Call markets exist where there is less trading volume, where only few equities available for trading and where there is lesser number of participants. Traders trading in call markets may have to wait long for get filled and this can increase the risk.

In auction market the prices are set based up on demand and supply; i.e. by buyers and sellers. The process is continuous and thus traders can get their orders filled in quick time. Many auction markets determine their opening and closing prices based on call market mechanism; all other trades are based on continuous mechanism.

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Non-deliverable forwards or NDFs are forward contracts on financial instruments (usually on foreign currencies) which are cash settled and do not involve the delivery of underlying instrument. NDFs are widely traded for non-convertible or thinly traded or futures trading banned foreign currencies. NDFs are traded over-the-counter and are usually settled in US dollars.

Non-deliverable forward is settled by taking the difference between the agreed upon exchange rate and the spot exchange rate at settlement time. NDFs have fixing date and settlement date. Fixing date is the date at which the price difference between the forward and spot exchange rate is calculated. Settlement or delivery date is the date at which the difference is paid to the receiver; settlement date falls usually 1 or 2 business days after fixing date. Usually NDF trading is done at offshore financial centers.

Non-deliverable forwards are usually used by companies which operate in nations of which currencies are not internationally traded. NDFs can be quoted for periods which range from one month to 1 or 2 years. Most NDF currencies are of emerging counties, and include Indian Rupee (INR), Philippine Peso (PHP), Korean Won (KRW) and Taiwan Dollars (TWD).

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The Week Ahead: Markets will try to build on last weeks rebound which was the best in 5 years. The credit freeze thawed somewhat as bank to bank lending rates eased but are still well above normal. With consumer sentiment having its steepest one month drop ever, barrowing demand by consumers may be experiencing a freeze of it own. Ben Bernanke will give his annual testimony to Congress on Monday, and the leading economic indicators are released. Realty Trac's Foreclosure Report is due Thursday and existing home sales on Friday.

Stocks to Watch: ING Group (ING) forecasts its first quarterly loss ever in Q3 as the stock hit a multi-year low. Also concerns that a cash infusion from a Dutch company will dilute earnings, but a bounce in the stock price seems due. Buying has pushed shares of Comstock Resources (CRK) up ahead of its addition to the Mid Cap 400 Index on Tuesday. Same goes for Nasdaq Omx Group (NDAQ) which will be added to the S&P 500 replacing Dillards (DDS). Leggett & Platt (LEG) sees sales falling in 08' for its residential furnishings as Q3 came in weak.

Special Note: The Dow Jones Industrial's 1900 point move off of last week's low or 24.2% was its biggest bounce of the bear market to date and fell right into the resistance pocket of 9600-10,000. For it to move through this range would likely take real fundamental improvement in the economy and renewed buying interest by investors. Problem is analysts have consistently been behind the curve in S&P 500 earnings expectations as the past 5 quarters declined 38% while expectations were seen flat or rising most of the time.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Exchange Traded Funds (ETFs) are still considered as new comers of financial market, and new types of ETFs, with different underlying indexes and instruments, are coming up. Now there is more than 600 ETFs available for trading and all of them is not suitable for all traders. Traders should select them according to their profit expectations, trading knowledge and trading preferences. Here are some factors which help in evaluation of ETFs.

1. Underlying asset or index: This varies considerably, many ETFs track major indices, some track foreign exchange indices and some others track specific sector/industry. Generally it is good to trade ETFs that track major, known and broad index.
2. Asset level: Evaluate the total value of the underlying asset that the ETF holding. It is better to avoid ETFs which falls below a certain asset level (eg: $10 million). ETFs having lower asset value are not so preferred by traders and thus have low liquidity.
3. Liquidity: This can be measured from daily trading volume. There are many ETFs which have daily activity of millions of shares and there are also many ETFs which are rarely traded. It is better to choose an ETF with fair/higher amount of liquidity and tight ask and bid spreads.
4. Tracking Error: Is the measurement of how closely the underlying index is tracked. ETFs which minimal tracking errors are considered better.
5. Market Leader: Usually ETFs which are first of that section/market have better chance of being the market leader as traders generally prefer them over ETFs which are imitations of the first.

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Doji are an important group of candlestick formations which carry important market information on their own and with preceding and following candlesticks. Doji candlesticks are characterized by very small body; formed as a result of very close (virtually equal) opening and closing prices. When taken singly doji are neutral candlestick patterns, but with adjoining candlesticks they indicate market reversal and bullish or bearish trends.

Doji candlestick formation can be of 4 types as common doji, long-legged doji, dragonfly doji and gravestone doji. Irrespective of the type, all doji formations are considered moderately reliable trading patterns which require confirmation.

1. Common Doji: The candlesticks look like a plus sign, cross or inverted cross. When they occur after a significant uptrend or downtrend, they indicate trend reversal.
2. Long-legged doji: This is a doji formation with long upper and lower wicks, and the body is ideally at the middle. They usually indicate high amount of indecision in market or high competition between buyers and sellers.
3. Dragonfly doji: They are doji formations which resemble English letter ‘T’. They are formed when sellers have dominated the trading session/day, but buyers have managed to bring the price back to opening level.
4. Gravestone doji: They are doji formations which resemble inverted ‘T’. They are formed when buyers have dominated the trading session/day, but sellers have managed to bring the price back to opening level.

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Directional and non-directional trading strategies are two broad classification of trading strategies. Directional trading strategies include any long-term or short-term trading strategies which include taking a long or short position in market. Non-directional trading strategies include trading strategies which include taking market-neutral positions.

Directional trading strategies are most widely followed trading strategies by both novice and experienced traders and investors; as they are easy to understand, can be used to trade all financial instruments, and need less automation and technical skills. These strategies usually follow some widely accepted trading policies such as taking net long position when market is predicted to go up, taking net short position when market is predicted to fall and using stop limits and other risk minimizing tools. Some common examples of directional trading strategies include trend-following trading strategies, break-out systems, pattern reorganization strategies and moving average crossover based strategies.

Non-directional or Market-Neutral trading strategies are complex strategies with loosely defined trading policies, which involve profiting from upward, downward and sidewise moving markets. These strategies are usually followed by very big traders like hedge-funds and institutional traders with the help of highly sophisticated and complex trading systems. Non-directional trading strategies involve careful matching of trading instruments, extreme money management and position sizing skills, and vast market knowledge. Some common examples include arbitrate strategies, sector/stock matching strategies, pairs trading strategies, etc.

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The Week Ahead: The rapidity of the stock markets decline last week left investors with the worst one week decline in its history. Banking leaders of the U.S., Europe, and Australia this weekend agreed to support financial firms to prevent failure. Initiatives such as buying bank securities are hoped to halt a financial crisis that none have seen before. The bond market will be closed Monday for Columbus Day. The Fed's Beige book, retail sales, and the Producer Price Index are released on Wednesday. The jobless claims and Consumer Price Index are due out on Thursday. September housing starts will be out by Friday.

Stocks to Watch: With the price of oil now below $80 a barrel, energy stocks had some of the biggest declines last week. Look for rebounds in companies like Anadarko Petroleum (APC), Conoco Phillips (COP), and Marathon Oil (MRO). With the dollar on the rebound, gold stocks were also leaders to the downside such as Agnico-Eagle Mines (AEM), Newmont Mining (NEM), and Goldcorp (GG). Morgan Stanley's (MS) debt rating was slashed this week as fear that a Mitsubishi investment of $9 billion would not hold the firm through the credit crisis.

Special Note: The breach of the 10 year moving average of 10,800 on the Dow Industrials and the pull of the 20 year moving average near the 7800 level mentioned here on September 22 was to great for the Dow Jones Industrials to withstand. It was hoped the internal trend line near the 9600 level which is drawn off the 1896 and 1903 low might hold, but will now act as resistance to future rally's. A yearly close beneath this trend line has occurred only four times in 112 years each with substantial declines. Therefore a close below 9600 for 2008 could make the coming year of 2009 one of the worst years for the DJIA and stock market as a whole.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Moving average crossover trading strategy is one of the most widely practiced forex trading strategies by both novice and experienced traders. The crossovers can be simple, where the price of currency crosses a moving average to very complex where more than one moving averages cross each other.

The trading system will generate buy and sell signals based on these crossovers. Generally a buy signal is generated when the currency cross above the moving average or when short-term moving average cross above long-term one; and a sell signal is generated in opposite situations. Traders can use different moving averages in accordance with their trading style. Day traders use shorter moving averages such as of 5 or 10 days with short-term intraday charts (eg: 5, 10 or 30 minute charts). Position traders and other long-term traders use longer moving averages such as of 20 days, 50 days or 200 days. With moving average crossover forex trading strategy, a buy signal is more predominant when market is on an upward trend and a sell signal is more predominant when market is on a downwards trend.

Advantages of MA Crossover Strategy

• Simple strategy, which is highly automated.
• The strategy removes emotion from decision making.
• Suitable for all types of traders.
• Easy to figure out entry and exit points.
• Offer better results in trending markets.

Disadvantages of MA Crossover Strategy

• MA is a slow/lagging indicator and traders blindly following the strategy usually place orders late (when opportunity diminishes).
• The strategy is less effective in non-trending and sidewise moving markets.
  

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Inflation derivatives or inflation-indexed derivatives are a subclass of derivatives which is used by investors to hedge the risk of increasing inflation. Many investors prefer them over inflation-indexed bonds (e.g.: Treasury Inflation Protected Securities TIPS and UK Inflation Linked Gilts), as they offer more flexibility and as they don’t require large amount of capital investments.

There are many products available under the category of inflation derivatives. They include inflation swaps, more specifically zero-coupon inflation swaps, options on inflation, and asset swaps. In swaps, one party pays at a fixed rate and the counter party pays at a rate based on the inflation rate of that period. This can be on a monthly or tri-monthly basis or on a year-on-year (YOY) basis.

For example take an inflation swap between A and B for a value of $10,000 for a year, where A – the inflation seller - agrees to receive a fixed/floating rate of payment from the counter party and B – the inflation buyer – agrees to receive an unknown payment, which will correspond inflation. If the fixed rate of payment is 6% and inflation is 7.1% for that year, then A receives a payment of $600 and B receives a payment of $710. In most cases Consumer Price Index or CPI is taken as the measure of calculating inflation.

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Three black crows is a bearish candlestick pattern, which indicate the possible reversal of an uptrend and start of a downtrend. Usually this pattern is formed at the top of an uptrend. Thee black crows pattern is three long dark (colored or bearish) candlesticks each closed below than previous day’s close.


The requirements of bearish three black crows candlestick pattern include

• The pattern should be formed after a significant uptrend.
• There should be three long dark candlesticks each closing at a new low.
• The opening price of each candlestick must be within previous candlestick body.

Bearish three black crows candlestick pattern is formed when the prices of instruments are at their highest prices (overbought conditions). On first day, because of increasing selling pressure, the price closes below the opening price of prior bullish candlestick. On second and third day the prices open above the previous day’s closing price but the increasing selling pressure causes the prices to close at lower levels than previous day’s closing price.

Thee black crows pattern is a modestly reliable candlestick pattern, which best support swing traders and position traders. The reliability of the pattern increases with 1) length of the candlesticks (but extremely lengthy candlesticks can create over-sold conditions), 2) shortening of lower shadow of candles and 3) with increase in trading volume.

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The Week Ahead: News of a worsening employment situation overshadowed the final passing by Congress of the long anticipated financial sector bailout package as markets continued the plunge to new lows. The FOMC Minutes from the last Fed Meeting are released on Tuesday while pending home sales are due Wednesday. Wholesale trade inventories are out on Thursday. Watch for the import price report and trade balance figures on Friday as well as chain store sales.

Stocks to Watch: General Growth Strategies (GGP) which specializes in retail mall properties has been under pressure do to the widening credit crisis, but a new CEO and takeover speculation may provide hope for a turn in the stock. First Industrial Realty Trust (FR) cut their 2008 earnings forecast in half as the stock accelerated to new lows. Penn National Gaming (PENN) cut its Q3 revenue guidance and was downgraded causing further declines in its share price to lower lows from last year's peak.

Special Note: A near term capitulation in selling could be developing as markets open this week. World markets are making lower lows along with the U.S. The break in prices below 10,800 on the Dow Industrials now opens the door for a move to the 9600 area which is where a very long term internal trend line dating back to 1896 is currently at on logarithmic charts. If so, then 10,800 will become resistance. The next Federal Reserve meeting is October 29, but some believe an interest rate cut is needed before this.

Commentary provided by Barry Ward, Registered Principal, NobleTrading .com, Inc.

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Law of one price is a financial law which states that the price of same (identical) instruments must be same at a given time in an efficient market. The law applies to most financial instruments available for trading/investing as commodities, equities, derivatives and funds. Example: the price of one commodity or equity traded in two different exchanges must be same at a point of time.

Whenever a violation from law of one price occurs, it creates an arbitrage opportunity. The arbitrator will purchase the instrument from cheaper market and will simultaneously sell those in market with high price. The process continues until the prices converge. The basic idea of law of one price is that as no trader will sell instruments below the market maker’s offer level and no trader will buy above market maker’s bid level, the prices will stay same (with in a range).

Law of one price does not apply to instruments when 1) they are non-tradable instruments, 2) they are traded at different time frames, and 3) traded in inefficient markets – i.e., when traders are unaware of exact market prices. Two good examples of Law of one price are Put-Call parity – the relationship exists between call and put options, and Interest rate parity – relationship between interest rate of two currencies.

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International ETFs or Global ETFs are exchange traded funds which buy and hold stock traded in foreign stock exchanges to make up their portfolio. The shares of these ETFs are available for trading in US stock exchanges, where they are traded just like stock. International ETFs help investors and traders to overcome many hassles involved in direct trading of foreign stock exchanges.

Advantages of international ETFs include

• Diversity of trading portfolio with investments in foreign growing economies.
• They allow you to invest your money in foreign markets, which are otherwise very hard or costly to access directly.
• ETFs have less management costs and are liquid trading instruments; also offer tax benefits.
• Unlike international mutual funds, one can get real-time value of global ETFs shares.

Now there are more than 100 international exchange traded funds available for trading/investing. Some popular ones include iShares from from Barclays, State Street International SPRDs and InvescoPowerShares international ETFs. Now there are country specific, exchange specific, regional specific, sector specific and foreign currency specific international ETFs available for trading.

When trading international ETFs, thorough analysis of the funds portfolio is necessary. You should make sure that there is enough liquidity and diversity available in the foreign exchanges. Fundamental analysis of the nation’s economy and understanding of major companies listed in foreign exchanges are also important.

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Futures spreads trading is considered a more evolved, profitable and less risky futures trading strategy than taking simple long or short positions. Spread is the process of taking long and short positions on two different futures contracts of the same or related underlying commodity. There are three types of futures spreads.

1. Calendar or Intracommodity futures spread: This is also known as Intramarket or interdelivery or horizontal or time futures spread. It is the most basic form of futures spread, where a trader takes long and short positions on futures with the same underlying commodity, but different delivery months. Eg: long October crude oil contract and short December crude oil contract.

2. Intermarket or Inter-commodity futures spread: A trader takes long and short positions on different futures contracts with different but related underlying commodities, and the same delivery month. Eg: long September Wheat and short September Soybeans. Inter-commodity spreads can also be calendar spreads, when the contracts have different maturity periods.

3. Inter-Exchange futures spread: It is a less commonly followed futures spread trading strategy, because of rarity of trading opportunities. In inter-exchange spread trading, a trader takes long and short positions for the same underlying commodity with the same delivery month but traded in different exchanges. Here the trader usually tries to profit from geographical differences and inefficient futures pricing. Eg: long July wheat traded in CBOT and short July wheat traded in KCBOT.

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Three white soldiers is a bullish candlestick pattern which indicates reversal of current downtrend and start of upward trend. It is considered as one of the most reliable trading pattern if it is formed after a prolonged downtrend or after consolidation of a downtrend. As name suggest, three white soldiers pattern consists of three long white (clear or bullish) candlesticks, each closed higher than previous day’s close.

The requirements of bullish three white soldiers pattern include,

• The pattern should be formed after a significant downtrend.
• There should be three long white candlesticks each with a new high.
• The opening price of each candlestick must be with in the body of previous candlestick.
• Second and third candlestick should have closing prices near to their highs.

Three white soldiers candlestick pattern best favors swing traders and position traders. The idea is that the prices of instruments should be at their lowest levels after a prolonged downtrend and the market will be ready to go up; and the increasing prices will force short-sellers to cover their positions. Reliability of three white soldiers pattern increases with 1) increase in length of candlesticks, 2) shortening of upper shadow (high price) of second and third candlesticks, 3) with increase in trading volume, and 4) and when the opening price of candlesticks are at or around mid-point of previous candlestick. Remember, if three white soldiers can formed at the top of an uptrend, it may indicate a near-future market reversal.

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Advance – Decline Index is one of the most powerful technical analysis tools for analyzing market strength of movement. It is a simple indicator which is derived as the difference between the total number of advancing (bullish) stocks and total number of declining (bearish) stocks. Advance/decline index favor all type of traders – short-term and long-term traders – and can be used for trading many financial instruments – stocks, ETFs, futures and currencies.

For easy interpretation, advance – decline index is often plotted on a chart called ‘advance – decline line’. The values for each point is calculated by the formula

A-D index = (No. of Advancing stocks – No. of declining stocks) + A-D value of previous period.

The period can be 30 minutes or 1 hour for short-term traders like day traders or can be days or weeks for long-term traders and investors.

Interpreting advance – decline line is also easy. When the market and the A-D line are in same direction (eg: market up and A-D up), the market movement is strong; and when the market and the A-D line are in different direction (eg: market up and A-D down), then the movement is weak. There are many technical analysis tools which combine other market parameters like volume, high and low values, price, etc with advance–decline index to get enhanced results.

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