What it means
Stock market indices can rise because of a few very large companies while most shares fall. To see how broad a move is, analysts look at how many shares changed hands in rising stocks and in falling stocks.
The upside/downside ratio compresses that into a single number. The calculation is simple: add up the volume of every stock that closed higher, which is the upside volume, and divide it by the volume of every stock that closed lower, the downside volume.
Stocks that did not change are left out. Analysts usually apply it to a whole exchange, but the same idea works for a sector or a portfolio.
A high ratio suggests that investors are putting money to work across the market, which is a healthy sign for an advance. A low ratio on a down day suggests widespread selling.
Analysts also watch the trend of the ratio over several days, because one strong day can be misleading. The measure helps check whether a move in an index is supported by participation.
If the index makes a new high but the ratio is weak, it suggests fewer stocks are driving the gain. This kind of mismatch is called a divergence, and it is often treated as an early warning.
The same phrase is sometimes used in a second sense in investment analysis. There it compares the potential gain from an investment with the potential loss, such as the distance to a target price against the distance to a stop-loss price.
Readers should check which meaning is in use. Like all indicators, the ratio has limits.
It reflects what has already happened, it can be distorted by one-off events and trading in index funds, and it does not show why the volume occurred. It is best treated as one of several signals.
In practice
Real-world examples.
Example
A market strategist notes that the index rose 0.6% on a day when the upside/downside ratio was 3.0. She describes the move as broad and convincing, since three times as much volume traded in rising shares as in falling ones. She keeps the fund's equity exposure unchanged.
Example
An investor sees a major index climbing to a record while the five-day average ratio drops from 1.8 to 0.9. He treats the fall as a warning and trims his position. He reviews the decision a week later.
Example
A trader screens for opportunities where potential gain is at least twice the potential loss. A stock at $20 has a target of $26 and a stop at $18, a ratio of 6 / 2 = 3. She takes the trade and sizes it so that a stop-out costs no more than $1,000.
Formula
Calculation
Upside/downside ratio = upside volume / downside volume
Suppose that on one day the shares in rising stocks traded 700,000,000 shares and the shares in falling stocks traded 560,000,000 shares. Ratio = 700,000,000 / 560,000,000 = 1.25. This means 25% more volume was in rising stocks than in falling stocks. For the risk and reward sense, if a stock at $50 has a target of $65 and a stop-loss at $45, the ratio is (65 - 50) / (50 - 45) = 15 / 5 = 3.Case study
Seen in the real world.
Lakeview Research is an illustrative, fictional firm that publishes a weekly market letter. During one week the main index rose 2%, but its analyst noticed that the daily upside/downside ratio averaged only 0.8.
He wrote that fewer stocks were joining the advance and that the rise came from a narrow group of large companies. He advised readers to be cautious and not to chase prices higher.
The next week the index slipped 3%. The illustrative lesson is that a rising index with weak participation is a signal to look more closely before committing more money. The analyst now publishes the ratio each Friday beside the index change, with a short note explaining any large gap between the two. Readers say that this pairing helps them separate real strength from a narrow rally.
Watch out
Common mistakes.
- Reading a ratio from one day as a trend, when a single day can be distorted by unusual events.
- Mixing up the market breadth ratio with the risk and reward ratio, when they answer different questions.
- Counting unchanged stocks in either side, when they should be left out of the calculation.
Questions
People also ask.
What is a strong reading?
There is no fixed level, but readings well above 1 show buying dominated and readings well below 1 show selling dominated.
How does it differ from the advance-decline ratio?
The advance-decline ratio counts the number of stocks rising and falling, while this ratio uses trading volume.
Can it be used for one stock?
Yes, by comparing volume on up days with volume on down days over a period.
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