Down Volume

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

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 numerous 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.

Traders may also follow the Positive and Negative Volume Indexes. These indexes are calculated from the following:

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 indicators also show volume is affecting price. If the PVI is decreasing it is another sign of down volume.