Summary:
- Bitcoin and altcoins can have a positive or a negative daily close based on the price difference compared to last day. If most coins close in the green, this is an “advance”. If they close in the red, this is a “decline”.
- The AD line is a market-wide trend indicator that can tell us if more coins are advancing than declining.
- The AD line oscillates between 0-10. A value of 0-1 indicates a bearish market, 1-2 a sideways market, and 2+ indicates a bullish market.
- If every coin is advancing, the line will reach a peak of 10. If every coin is declining, the line will reach a bottom of 0.
- The AD line chart looks the same on all crypto charts because it measures the performance of the market as a whole.
- There are limitations on the AD line because the indicator was primarily developed for the stock market.
- The AD line indicator is available for all Phemex spot and futures market charts.
What is The Advance Decline Line?
The AD line (advance/decline) is a momentum indicator that tracks advances and declines in the crypto market. The AD line can be used on the Bitcoin (BTC) and other crypto charts. It’s based on the daily performance average and most commonly used on the 1D (daily) charts.
The AD line is a cumulative indicator that tracks the performance of the market as a whole. Coins like Ethereum (ETH) have positive or negative daily performance. The AD line tracks whether more altcoins are advancing or declining on the daily – illustrating the results with a single line.
The AD line oscillates between 0-10. If the AD line is between 0-2, we could be in a bear market or a sideways market. If the price for most coins on the market is growing, the AD line will go up. The best time to buy altcoins is when the AD line goes above the 2 value on the chart.
The indicator is based on the average of green or red closes. It can help us discover if the crypto market is bullish or bearish. A patient trader can use this indicator to discover ideal conditions to purchase coins and plan an exit strategy accordingly.
How to Calculate Advance Decline Ratio?
The AD line formula is the following:
The advance decline indicator formula.
The most important variable here is “Net Advances”. On Phemex, the indicator calculates the amount of coins that closed in the green at 00:00 UTC time, and then subtracts them by the number of coins that closed in the red to get net advances.
We use the data derived from the previous closes to compare it with data from the next day’s. Our calculations are then fed to the indicator. The process is repeated indefinitely as we keep adding new coins on the markets.
The AD line is based on recent data and it oscillates harder than most other indicators. The result could be 3 one day and 10 the next day. The indicator can peak multiple times per year, especially if the crypto market is in an uptrend and Bitcoin is making big moves.
What Is The Advance Decline Line Based On?
The AD line is based on the advance decline index and the absolute breadth index. The AD index is the formula mentioned above, using advancing and declining coins as the basis for the market dynamics. The individual gain rate of coins does not matter as much as the daily close performance.
For example, if Solana (SOL) generates 15% growth and Cardano (ADA) generates 13% growth for the day, the AD line formula would only register them as 2 positives for the day. If the remaining 51 spot market pairs record negative growth, the indicator would record them as 51 negatives for the day. The AD line would in that case oscillate near the bottom because most coins showed a decline.
The individual performance of the coins does not reflect in the AD line indicator as much as the market-performance as a whole. In the rare occasion that all market pairs close in the green, the oscillator would reach its peak at 10. If all coins close in the red, it would drop down to 0. The AD line often oscillates between 1-2 and goes above or below with extreme price action.
How to Use The Advance Decline Line?
For this demonstration, we’ll use the BTC/USDT chart on Phemex. The advance decline line is available on all spot market and futures trading pairs.
The BTC/USDT chart is the most traded chart on Phemex.
The values are calculated based on daily performance which means we want to use the “D” (daily) chart. Left-click on D at the top-left and zoom out using the scroll wheel on your mouse for the best long-term perspective on Bitcoin.
Press on “Indicators” at the top and search for “Advance”:
Search for Advance Decline Line among dozens of useful indicators on Phemex.
Left-click on it and it will load beneath the Bitcoin price chart:
The AD line indicator is loaded below the Bitcoin chart.
The advance decline line chart is now active. The settings for the indicator can be altered by hovering over “AD 10” at the bottom-left and pressing “Settings”:
Optional settings allow traders to adjust the indicator.
This will open up a new window where you can alter settings for the indicator. The chart length is set to “10” by default which means the line will oscillate between 0-10.
We recommend leaving the default, but a trader could change it to 5 or any arbitrary number. In the “Style” section, the color of the line can be changed from the default red to any other color (to work with other indicators).
The current value of the indicator is “1” which means the crypto market is going sideways and coins have 0-1% fluctuations on average. If we check the Phemex spot markets for the daily performance of coins, we can verify this data with the top 5 most traded coins:
The top 5 most traded coins on Phemex by daily volume.
Under “24 change” we can see that the average percentage change for most coins is under 1%. The top coins are not gaining or losing a lot which means we’re not in a bull market or a bear market. We’re in a sideways market and the “1” rating on the AD line reflects that.
We can use the AD line to discover when it was the best time to buy altcoins or get into crypto in general:
The two market peaks on the AD line chart.
The crypto market peaked in early 2021 when Bitcoin went on a massive bull run and gained 600%, starting at $10,000 and making its way to a $60,000 all-time high. The entire crypto market was in the green for weeks at a time. There was a second peak in August 2021 when altcoins started seeing growth after Bitcoin’s recovery.
There were also minor peaks throughout the year when the cumulative advance decline line reached 5. These were also great opportunities to capitalize on market growth regardless of the crypto a trader had invested in.
Using historic data, we can conclude that the best time to buy altcoins is when the value crosses over 2 on the AD line chart. This indicates extreme bullishness across the entire market.
Advance Decline Line Strategy
Traders can use the AD line indicator to open long and short trades on Phemex:
AD Line Longs
If Bitcoin makes a move and the AD line indicator is above 2 for at least 5 daily closes, this is a good time to open a long trade.
The idea is to open the trade early before the indicator reaches 10 (bubble territory) and the entire market is posting gains for too long. If you don’t open a trade early, you could FOMO in at the top and get a pullback. The ideal average is 5 consecutive green days for most long trades.
AD Line Shorts
Short traders are riskier than long trades because the Bitcoin chart has recovered and surpassed every peak in the last 12 years of its existence. If you want to bet that Bitcoin will go down, wait for the AD line to go below 1 and at least 5 negative daily candles.
Pro Tip: Use a stop-loss for both short and long trades. Stop-losses are safety prevention mechanisms that close a trade whenever it drops below a certain percentage in losses.
Are There Downsides To The Advance Decline Line?
The main downside of the AD line indicator is also its biggest strength – it measures the performance of the crypto market as a whole. This can skew a trader’s opinion that it’s not a good time to enter the market if it’s not bullish enough and/or if there’s not enough price action until the right time comes.
The coins will always differ percentage-wise. For example, if the AD line is at 10 and all coins are making daily gains – some coins such as Terra (LUNA) could post 40% gains while others like Chainlink (LINK) might close at 5%. The trader will still have to pick individual coins based on their performance expectations. A smart trader still has to follow the news and read about positive developments that could lead to price appreciation.
The advance decline indicator should only be used as a measurement tool to gauge the state of the market at large. Traders should not rely on it exclusively, but take advantage of other trading indicators such as RSI (Relative Strength Index) and MA (Moving Average) for individual coins, and then use it as confirmation the market is moving in the right direction.
Conclusion
If the advance decline line is rising, this signals a bullish trend that we can expect price appreciation for the crypto market as a whole. Phemex uses unique values based on the performance of our 50+ spot market and 30+ futures market pairs.
Conversely, if the line is declining, this doesn’t mean that there’s an imminent bear market but it could only indicate sideways movement. The best time to buy altcoins is when the line starts oscillating above the minimum values and coins start gaining significantly on the daily chart. The indicator works great combined with momentum indicators and gives us a fresh perspective of the crypto market.
Register to get $180 Welcome Bonus!
