Breadth is an indicator that is understood by many but consistently used by a few. Breadth indicator helps a trader understand the participation of stocks in a market move. Using Breadth, we can understand how many stocks in a basket of stocks are in momentum, are trending, or are volatile. This helps us understand the health of the market move. In this newsletter, let us explore what Breadth indicator is and why a trader must use it.

Understanding Breadth indicator

In simple terms, breadth measures how many stocks in a given basket, such as an index or a custom selection, meet a specific criterion. This basket should represent the overall market environment. Breadth helps assess market participation based on factors like momentum, trend, or volatility, typically from a bullish perspective.

Once a criterion is defined, the indicator calculates the percentage of stocks meeting that condition. For example, let us say Nifty 200 is trading above its 21-EMA line and is entering an uptrend and we want to know if this market move is because of some heavy weights in the index or because majority of the stocks are also participating as well. To analyze this using Breadth, we may set the criterion as high price above the 21 EMA. The 21-day EMA is commonly used to gauge short-term trends—prices above it indicate an uptrend, while prices below suggest a downtrend.

If 150 out of 200 stocks in the Nifty 200 meet this condition, the breadth indicator will display 75% [(150/200) × 100]. This calculation is updated daily and plotted as a line, helping traders visualize the participation over time.

One simple interpretation of Breadth using this criterion is that for a trend to be “healthy”, there should be more than 50% Breadth. That is, there should be a participation from more than half of the stocks in the index.

Similar to this, if we want to know understand the momentum of the overall market, we can use a momentum indicator like RSI or ADX with a criterion that defines momentum.

Observe the chart below of Nifty 200’s breadth using the specified criterion. The breadth indicator is plotted beneath the Nifty 200 price chart, where the 21-day EMA is also displayed. On the breadth indicator, the 50% level is marked with a pink dotted line.

Notice that when Nifty 200 traded above the 21-EMA, the breadth indicator rarely dropped below the 50% line, signaling strength in the uptrend. Conversely, when the index moved below the 21-EMA, the breadth indicator also declined below 50%. This suggested that less than half of the stocks in the index were trading above their respective 21-EMA, indicating a weakening uptrend.

Why reading the Breadth is important?

Breadth as an indicator plays a crucial role for traders in several ways.

First, it helps identify the right time to enter a trade by analyzing the overall market trend. It can serve as both a cautionary signal and a confirmation signal when considering fresh trades.

Second, analyzing the breadth of different sectors allows traders to identify which sectors are showing strength and are worth participating in.

Third, it provides insight into whether an index's trend is broad-based and healthy or if it is being driven primarily by the movement of a few heavyweight stocks.

Fourth, breadth can act as an early warning signal for potential trend reversals by highlighting overbought conditions in the market.

Regularly analyzing market breadth can help traders stay aligned with market trends and plan their trades more effectively. One of its advantages is that it can be calculated using objective criteria, including noiseless charting methods such as Point & Figure charts, making the analysis more structured and reliable.

A course on breadth analysis has been highly requested over the past year. In response, we will be launching a new course on breadth analysis in the third week of April 2025.

Before the official launch, a four-hour live session on the course will be held exclusively for TNT One members. If you are interested in exploring breadth analysis and attending the live session, you will find TNT One membership valuable. Along with the new and upcoming courses, TNT One give you access to over 200+ hours of resources on financial markets, trading, and investing. This membership will be valuable no matter if you are a beginner or a seasoned market participant. Do check it out!!!