Advance-Decline Ratio (ADR) is a widely used market breadth indicator that helps investors and traders assess the overall strength or weakness of the stock market. Instead of focusing on index levels alone, ADR evaluates how many stocks are rising versus how many are falling, offering a clearer picture of market participation.

The Advance-Decline Ratio is calculated by dividing the number of advancing stocks by the number of declining stocks on a particular trading day. If more stocks are advancing than declining, the ADR will be above 1, indicating positive market breadth. Conversely, a ratio below 1 suggests that declining stocks dominate, reflecting weak or negative breadth.

Why ADR Matters is best understood through its ability to reveal underlying market sentiment. Indices can sometimes rise due to gains in a few heavyweight stocks, even when the broader market is weak. ADR helps identify such divergence by showing whether market gains are supported by a majority of stocks or driven by a limited few.

How Traders Use ADR varies by strategy. Short-term traders often use intraday ADR to confirm trend strength, while long-term investors monitor ADR trends to understand whether market rallies or corrections are broad-based. A consistently rising ADR signals healthy participation, whereas a falling ADR during a rising index may warn of weakening momentum.

Limitations of Advance-Decline Ratio should also be considered. ADR does not account for the magnitude of price changes and treats all stocks equally, regardless of market capitalization. Therefore, it works best when combined with other indicators such as volume, price trends, or sector performance.

In summary, the Advance-Decline Ratio is a simple yet powerful tool for understanding market breadth. When used responsibly and alongside other indicators, ADR can help investors make more informed decisions without relying solely on headline index movements.