Down Volume (or Down on Volume) What it Means For a Security

What Is Down Volume?

Down volume occurs when a security's price decreases accompanied with a high volume of trading. Down volume is a trading scenario that may also be referred to as down on volume.

This can be contrasted with up volume.

Understanding Down Volume

Down volume refers to high volume trading that affects the stock negatively. Down volume is the opposite of up volume, in which a security's price increases with higher volume. Down volume indicates bearish trading, while up volume indicates bullish trading.

If the price of a security falls, but only on low volume, there may be other factors at work aside from a true bear turn. For example, some market makers or other participants are away on vacation leading to less liquidity than usual, or buyers are waiting for the price to move slightly lower before entering bids. Either way, down volume reflects a condition where the price moves down along with increases in trading volume that confirms the price move lower.

Noise traders tend to be significant contributors to high volume trades. In certain situations, a stock may be rising on a positive development within the company that has just been released to the public. If the news was unanticipated, it can cause a high volume of trading from both institutional investors and retail investors as the stock corrects and increases to the upside. Often, noise traders will greatly contribute to high volume trading days since these investors follow trends and trade heavily based on emotional sentiment.

Most technical analysts and institutional investors will follow the volume of a security that they are considering for investment. A spike in volume is typically caused by a significant market catalyst that merits attention. Many technical analysts believe that volume can also be a signal of a price breakout in a bullish or bearish direction.

Volume

Volume is one market factor that can influence the price of a security. Volume is defined by the number of shares of a security traded over a specified period of time. Generally, traders will watch the volume of a security from day to day, referring to days when a price decreases as down volume days.

There are several factors that can influence volume. Down volume days are typically influenced by negative news about a stock directly or news influencing the stock indirectly. Lower than expected earnings reports or negative news about a company’s sales, management, or management decisions can cause a high volume of trades in what may be known as a selloff.

In a selloff, the majority of volume trading is to the downside, meaning investors are rapidly selling versus buying which has a negative effect on price. Generally, high-volume days can be heavily influenced by noise traders who are non-professional traders that tend to trade more often when high profile news about a company is released. Trading from noise traders can cause more drastic negative effects on the stock than necessary, which can at times create a buy opportunity from overselling.

There are several indicators traders can watch to interpret volume and understand its effects on a security’s price. Three of the most popular indicators are volume weighted average price (VWAP), Positive Volume Index (PVI) and Negative Volume Index (NVI).

The volume weighted average price is a trendline drawn from a moving average of the following calculation:

VWAP = (Security Shares Bought x Security Share Price) / Security Shares Bought

Traders monitoring volume's influence on price will typically watch for a VWAP cross. When a VWAP cross spikes to the downside and crosses over a security's candlestick pattern it is a sign of down volume selling. If this pattern is detected it can be an early indicator of a bearish trend in a security’s price. Traders typically seek to benefit from this signal by selling to take advantage of a falling price.

PVI and NVI

The Positive and Negative Volume Indexes (PVI and NVI) were first developed by Paul Dysart in 1936 to help investors discern some of the effects of market trading volume. PVI and NVI then became more popular in the 1970s after the calculations were expanded to individual securities.

PVI: If current volume is greater than the previous day's volume, PVI = Previous PVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous PVI}. If current volume is lower than the previous day's volume, PVI is unchanged.

NVI: If current volume is less than the previous day’s volume, NVI = Previous NVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous NVI}. If current volume is higher than the previous day's volume, NVI is unchanged.

These index values provide insight on how prices are fluctuating with trading volume. In an up volume trend, PVI would trend higher as volume increased. Thus, investors seeking to profit on bullish up volume trading could use the PVI as one indicator for potential price signals.