What is Downtick Volume?
Downtick volume is the number of shares of a given security that have traded at a price lower than the immediately preceding transaction price. Downtick volume is used to express the amount of activity in the market.
- Downtick volume is the number of shares or contracts that change hands at a price lower than the prior transaction price.
- Downtick volume provides insight into the intensity of selling pressure.
- High volume on downticks indicates a strong desire for traders to sell.
What Downtick Volume Tells You
Downtick volume is an indicator analysts and traders use to understand current movement within an asset's price. When a transaction occurs at a higher price than the previous transaction, that is an uptick. When a transaction occurs at a lower prior price than the previous transaction, that is a downtick. By extension, downtick volume is how many shares or contracts change hands on the downtick.
Downtick volume can be calculated cumulatively throughout the day. Or it can be calculated across a number of stocks—thus indicating whether selling interest is widespread across a number of stocks, or whether the strong (or weak) selling is isolated to a particular stock.
Volume can also be looked at (on any timeframe) to assess whether there was increased or decreased volume during that period. If the price drops over a period, on higher than prior volume, that indicates increased sell power occurred. If the price drop occurs on lower than average volume, that indicates the selling may not be powerful, but unfortunately prices can continue to fall even on low volume.
Downtick Volume as a Market Indicator
A common indicator that compares upticking stocks to downticking stocks is the Tick Index. The indicator creates a ratio of how many stocks on the NYSE are making upticks versus downticks.
The ratio is considered extreme when it exceeds or +1,000 or –1,000. If the tick hits –1,000 watch for a reversal. There has been a lot of selling that could soon exhaust itself. Short-term traders will be watching their charts for a potential turn to the upside. That said, there is no guarantee the price will turn soon, or for how long.
Traders can also watch for the downticks to start. Anytime the Tick Index starts moving down indicates that more stocks are starting to see downticks (selling). This could be used as a short-term indicator to exit long positions or enter short positions.
The Tick Index is one example of how downticks can incorporated into a trading strategy. The Arms Index (TRIN) is somewhat similar and looks at how many stocks are advancing versus declining, and on how much volume. Since this indicator incorporates volume, it is often used in conjunction with the Tick Index.
Difference Between a Downtick and a Tick
A downtick is when a transaction occurs at a lower price than the prior transaction price. A tick is the smallest movement that a price can make, in either direction. However, a downtick is not limited to only moving one tick. Transactions could be wide apart, representing many ticks of movement.
Example of Using Downtick Volume
The following chart shows a 1-minute chart of Facebook (FB). It does not show tick data, as most use traders use timeframes of one-minute or higher for analyzing charts, as opposed to looking at every single transaction.
The chart shows an overall downtrend, yet by looking at price and volume a trader may notice the intensity level of the selling. Given that the overall price movement was down, the volume tends to pick up as the price sells off. This pattern repeated several times throughout the day. This doesn't necessarily provide trade signals in and of itself, but may help a trader confirm trade signals based on other strategies, and note the overall bearishness of the day.
Limitations of Using Downtick Volume, and Uptick Volume
Downtick and uptick volume is a very short-term measure of price movement strength. It shows what happens transaction-by-transaction, and therefore can be quite erratic as an indicator.
The information is historical. It tells us a transaction occurred, or cumulatively shows us what has happened, but unless very specific patterns are found in the data, having this information may not necessarily lead to knowing when is a good time to buy or sell. Like any indicator, it is up to the trader to use profitably.
Downtick volume is best used in conjunction with other forms of technical analysis. For example if the price is in a downtrend, downtick volume and the Tick Index and Arms Index may be helpful in sticking with a short trade until there is evidence that the stock or the stock market, as a whole, is losing momentum to the downside. As the price action and these indicators start to give positive signs, confirming each other, then it may be a good idea to get long.