Down Volume (or Down on Volume): What It Means for a Security

What Is Down Volume?

"Down volume" is a term that describes the drop in price of a security in conjunction with a high volume of trading in that security, during a particular trading session.

Down volume may also be referred to as down on volume.

This can be contrasted with up volume, where a security's price increases in conjunction with high volume trading.

Understanding Down Volume

In trading, volume is a measure of the number of transactions conducted in a security in a specific period of time. It can indicate trader and investor interest, or the lack thereof. The higher the volume, the greater the interest in either owning or selling a security. The lower the volume, the less the transaction activity in a security.

Down volume in particular refers to high volume trading in a security that affects the price of that security negatively. Persistent down volume can indicate bearish trading (while persistent up volume indicates bullish trading).

Trading on Low Volume

If the price of a security falls on low volume, there may be other factors at work aside from a true bear turn. For example, some traders and investors may be selling that security to lock in profits they've made on paper.

Or, some market makers or other participants may be out of the market for a few sessions (e.g., they're away on vacation). This could affect trading liquidity and result in down market days with few participants.

Or, buyers may be waiting for the security's price to move slightly lower before entering bids.

Trading on High Volume

But ongoing and significant volume associated with a decreasing price—down volume—points to the potential for a change in the price trend for a security. It indicates substantial trader interest in selling.

Generally, traders will watch the volume of a security from day to day, referring to days when a price decreases and volume rises as down volume days.

Factors Affecting Down Volume

Several factors can influence down volume. Down-volume days can be influenced by negative news about a specific company and its stock or industry news that may influence the stock's price 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 more investors are rapidly selling rather than buying. As you might expect, this has a negative effect on price.

In addition, high-volume days can be heavily influenced by noise traders. Noise traders are non-professional traders who tend to trade more often when high-profile, attention-grabbing news about a company is released.

Because they follow perceived trends and trade heavily based on emotions, noise traders can cause more drastic negative effects on the price of a stock than necessary. At times, this can create a buying opportunity related to overselling.

In certain situations, a stock may rise on news of a positive development within the company that has just been released to the public. If the news was unanticipated, it might cause a high volume of trading from both institutional investors and retail investors as the stock corrects and increases to the upside.

Volume Indicators

There are several indicators traders can watch to interpret volume and understand its effects on a security’s price. Three of the most popular volume indicators are:

• Volume weighted average price (VWAP)
• Positive Volume Index (PVI)
• Negative Volume Index (NVI)

VWAP

The volume weighted average price is a trendline drawn from a moving average that includes volume. It is calculated using the following formula:

VWAP = (Cumulative Typical Price x Volume) / Cumulative Volume

• Typical price is the sum of the high price, low price, and closing price divided by three.
• Cumulative is the total value from the start of the trading session.

Traders who monitor volume's influence on price will typically watch for a VWAP cross. This occurs when a chart shows that a security's price trendline crosses over the VWAP moving average trendline.

For example, a VWAP cross that spikes to the downside is a sign of down volume selling. This pattern 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. Typically, they are viewed together.

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 traders and investors with insight into how prices are influenced by trading volume.

PVI reacts to growing and high-volume days. It incorporates the point of view that uninformed traders and investors who follow the crowd engage in trading as volume increases. NVI is associated with smart money, informed trading, and reacts to decreases in volume.

The Bottom Line

Down volume, or down on volume, refers to the simultaneous drop in price for a security and a high volume of trades for that security in a specific trading session.

The high volume indicates that there is great interest in selling that security and may point to a change in its price trend to the downside. It's important to monitor volume figures over time rather than in isolation to develop an understanding of when a down volume day may be most significant.