What is Breadth Indicator: Overview, Examples

Breadth Indicators are the category of tech analysis instruments that help traders understand the overall situation on the market and predict further trend reversals. Breadth indicators are widely used on different financial markets.

Key takeaways:

• What is the core notion of a Breadth Indicator?
• Which instruments does the category of Breadth indicators include?
• What are the pros and cons of Breadth indicators?
• How to use Breadth indicators properly?
• Which tech instruments are Breadth instruments combined with?

What is the Market Breadth and How to Calculate it?

When talking about the Breadth indicators, those instruments help traders understand the current market breadth. What does it mean? Let’s clarify the term applying to stocks that are traded on NASDAQ for instance.

Within a trading day some stocks drop down when others increase in price. The market breadth is the difference between the number of advancing stocks and the number of stocks that lost their value within a trading day. When the number of advancing stocks is higher than the number of declining ones, the market breadth is positive, and vice versa.

Breadth indicators are based on the number of either advancing or declining stocks. The value is usually expressed as:

• the difference between the number of advancing and declining stocks;
• the ratio of the number of advancing stocks to the declining ones;
• the Advance/Decline line that is understood as the cumulative value of the difference between the number of advancing and declining stocks.

Based on the above mentioned possible representations of the market breadth, there are several types of indicators.

The Types of Breadth Indicators

When talking about the types of Breadth indicators, there are tens of instruments, more or less widespread; meanwhile, one can point out some instruments that are widely used in tech analysis:

• ADP (Advance/Decline Percent). The percentage of advancing assets with a certain cluster or industry.
• HLP (High/Low Percent). The percentage of advancing or declining assets that made their 52-weeks highs/lows.
• Percent above EMA200. The percentage of assets that are above the EMA 200 line.
• ADL (Advance/Decline Line). The line that represents the overall difference between the number of advancing and declining assets.

Let’s dive deeper into the given types to understand better how breadth indicators work and what traders get from such instruments.

ADP (Advance/Decline Percent)

ADP is a market breadth indicator that shows the percentage difference between the number of advancing and declining assets. The percentage is calculated on the daily basis. Using the Advance/Decline Percent indicator, traders understand whether bulls or bears dominate on the market and how strong their positions are.

For instance, we may calculate the ADP value for S&P 500 stocks. Within a trading day, 320 stocks from the S&P 500 are advancing and other 180 stocks are declining. To calculate the percentage, we need to use the following formula:

ADP = (NA – ND) / ON)

• NA – the number of advancing assets;
• ND – the number of declining assets;
• ON – the overall number of assets.

As such, the Advance/Decline Percent for S&P 500 stocks is as follows: (320-180)/500. We get 0.28 or 28%.

HLP (High/Low Percent)

HLP is the indicator that takes into account how many assets have made their 52W highs and lows. The indicator shows the data calculated on a daily basis. Traders get enough information to identify the current market trend.

For instance, 25 stocks from the S&P 500 reached their new highs and no stocks declined to the 52W lows. We need to use the following formula:

HLP = (NH – NL) / ON

• NH – the number of assets that reached their 52W highs;
• NL – the number of assets that reached their 52W lows;
• ON – overall number of assets in the sector or index.

When talking about S&P 500 stocks we have the following results: (25 – 0) / 500 = 0.05 or 5%.

Percent above EMA 200

The Percent above EMA 200 indicator shows how many assets are above the EMA 200 line. Like the High/Low Percent, this indicator falls into the category of trend ones and provides traders with lagging signals. Meanwhile, the usage of the exponential Moving Average instead of the simple one makes those signals more precise.

For instance, 70 S&P stocks are above their EMA 200 lines which means the Percent above EMA 200 index is 70/500 = 0.14 or 14%.

AD (Advance/Decline) Line

The AD line is a tech indicator that shows the daily difference between the number of advancing and declining assets.

Hence, despite the broad variety of different types, the goal of the breadth indicator is one and the same – to inform traders/investors about the difference between the number of advancing and declining assets within one group, cluster, market, etc.

What Do Traders Get from Breadth Indicators?

Why do professional traders use breadth indicators and why are those useful enough?

• Breadth indicators help traders understand the overall “mood” of the market. Based on the received data, traders easily interpret whether bulls or bears control the market at present.
• These indicators let traders identify the current trend and its strength. Furthermore, breadth indicators show the ongoing trend removals.

When talking about tech analysis, a lot of top-rated instruments are somehow based upon the breadth indicators (OBV, Chaikin Oscillator, etc.):

The Pros and Cons of Breadth Indicators

Breadth indicators are characterized with the following strong points:

• Traders get enough data to identify the current market trend and understand whether bullish or bearish sentiments dominate the market.
• Apart from the trend direction, breadth indicators help traders determine how strong the current trend is.

When talking about the cons, the following ones are pointed out:

• First and foremost, breadth indicators do not take into account assets that are not included into a certain group or cluster. In case of excluding assets from that group or cluster, the indicators may provide traders with false signals.
• Indicators assign equal weight to every asset no matter what is the market capitalization. Here is why such an instrument is less sensitive to changes affected by assets with high market cap.

Which Tech Instruments to Combine with Breadth Indicators?

No matter how useful breadth indicators are, professional traders prefer to combine them with other tech instruments to get more precise trading signals. What are the instruments that are combined with breadth indicators the most frequently?

• RSI. The indicator helps to find out the areas where an asset is overbought/oversold.
• MA. Different moving averages are widely used to prove the current market direction and its strength.
• Bollinger Bands. The instrument helps traders understand which breakouts are signals for sharp trend movements.

The Bottom Line: Are Breadth Indicators Useful for a Trader?

Breadth indicators can be understood as a ground that lets a trader understand the overall situation on the market. Such a category of tech instruments helps traders determine the current trend, its strength, and the possibility of the ongoing reversal. Meanwhile, to get precise trading signals one should use breadth indicators in the combination with other tech analysis instruments.