What it means
Every trading day, each stock on an exchange either closes higher, lower or unchanged compared with the day before. Up volume adds together the shares traded in the stocks that rose, and down volume adds together the shares traded in the stocks that fell.
Comparing the two gives a sense of where money is flowing, which is more informative than the price change of an index alone. The reason it matters is that volume shows conviction.
A stock that falls 1% on thin trading may simply be drifting, while a fall on very heavy trading suggests that many investors are heading for the exit. When a large majority of volume is in falling stocks, the market is said to be internally weak, even if a few big companies are holding the index up.
Analysts usually express the idea as a ratio or a percentage. The up/down volume ratio divides up volume by down volume, and a figure well above 1 signals strength while a figure well below 1 signals weakness.
Some traders also track the number of days on which down volume exceeds 90% of the total, which they treat as a sign of heavy selling. Down volume is often used to confirm or question a trend.
If an index makes a new high while down volume is rising, the rally may lack support, a pattern known as divergence. If an index falls sharply and down volume is extreme, the selling may be close to exhausted, which can mark a short-term bottom.
There are caveats. Volume figures are usually reported for a single exchange or a group of exchanges, so the numbers can differ by source.
Heavy down volume also happens on days of index rebalancing or option expiry that may not reflect a change in sentiment, so the data should be read alongside other signals.
In practice
Real-world examples.
Example
A market commentator notes that an index closed down only 0.3%, but that down volume made up 85% of total volume. She warns that selling was widespread and that a few large companies hid the weakness. Her listeners decide to review their stop-loss levels.
Example
A day trader tracks the up/down volume ratio on her screen throughout the session. When the ratio drops from 1.2 to 0.5 within an hour, she closes her long positions. The market falls further in the afternoon.
Example
A fund manager preparing a weekly note observes that a rally is occurring on falling up volume and rising down volume. She tells her team that the advance looks fragile. She delays a planned purchase of $2,000,000 of shares until the signals improve.
Formula
Calculation
Down volume = Sum of trading volume of all stocks that closed lower than the previous close
Up/down volume ratio = Up volume / Down volume
Worked example: on one trading day, the volume of advancing stocks totals 600 million shares and the volume of declining stocks totals 400 million shares.
Step 1: Up volume = 600 million shares and down volume = 400 million shares
Step 2: Total volume = 600 million + 400 million = 1,000 million shares
Step 3: Down volume share = 400 / 1,000 = 40%
Step 4: Up/down volume ratio = 600 / 400 = 1.5
The ratio above 1 shows that buying interest outweighed selling on the day.Case study
Seen in the real world.
Oakridge Securities is an illustrative, fictional brokerage whose research desk published a daily market breadth report. One Tuesday, the main index rose 0.4%, and the headline sounded positive.
The desk's report showed that up volume was 380 million shares and down volume was 620 million shares, giving a ratio of about 0.61. Most of the index's gain came from three very large technology companies, while the majority of stocks fell.
The strategist advised clients to be cautious, and the market fell 2% over the following week. The illustrative lesson is that down volume can reveal weakness beneath a calm headline, although it does not predict the future with certainty.
Watch out
Common mistakes.
- Assuming heavy down volume always means a crash, when it may reflect rebalancing or expiry days.
- Looking at price alone, when volume shows how strongly investors feel about a move.
- Comparing figures from different exchanges, when each source may count different venues.
Questions
People also ask.
What is the difference between up volume and down volume?
Up volume totals the shares traded in stocks that closed higher, while down volume totals the shares traded in stocks that closed lower.
Is high down volume bullish or bearish?
It is usually bearish because it shows selling pressure, although extreme readings can sometimes mark a short-term low.
How do traders use the up/down volume ratio?
They compare it with 1, treating readings above 1 as positive and below 1 as negative, and they watch for divergence from the index.
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