WHAT IS Downtick Volume
Downtick volume is the number of shares of a given security that have been traded at a price lower than the immediately preceding price. Downtick volume is used to express the amount of activity in the market, and can be used to predict when the market will reverse.
BREAKING DOWN Downtick Volume
Downtick volume is used as an indicator for analysts and traders to understand current movement and predict future movement of the market. Trading volume is an indicator of volatility.
When prices of stock shares were continuously printed on ticker tape throughout the trading day, prices "ticked" up or down, so a movement in price was called a downtick or uptick. A downtick is a movement down in price. The share price is lower than the previous price of a given security. A downtick is a sale of a share, whereas an uptick is a purchase of a share.
The number of shares traded, or trading volume, indicates the intensity of the market for a given security. High trading volume indicates intense interest in a stock. Technical analysts use downtick volume to calculate a security's net volume, which may provide a buy or sell signal.
Downtick Volume as a Market Indicator
Analysts and traders use downtick volume in combination with other measures to create tools that help them analyze markets and predict future movement of markets. One of these tools is Uptick/Downtick Ratio, which is usually measured daily. This ratio compares the volume being bought at a higher price then the previous price to the volume being sold at a lower price than the previous price. This ratio tells analysts what institutional traders are doing, which can tell them what's likely to happen next in the market for this given security.
If the ratio is even, either there isn't much trading volume or the volume is even between buying and selling, and market makers are not making big plays and there's no strong direction to reverse from. If the ratio is extreme, with much heavier volume either in buying or selling, this indicates that institutional investors are deliberately moving. If the uptick volume is significantly high, this indicates that institutions are buying up shares and using up cash. If the downtick volume is significantly high, institutions are selling out to build up cash reserves. When these extremes happen, the market is likely to reverse suddenly, and analysts who watch the Uptick/Downtick Ratio can be ready for this reverse.