Volume Tutorial:
Upside/Downside
Indicators.
Because
volume is independent of price, it makes a valuable tool for measuring the
quality of a price trend. Since volume is a leading indicator,
volume indications often show up before any change in price occurs.
Volume analysis often reveals future movements in price before they happen. Since high volume can
be intense buying as well as
intense selling, the most effective indicators relate up volume to down volume
to determine which trend is prevailing in the market. This allows for conditions
to be signaled where the market is becoming overbought or oversold.
Advancing, declining, and unchanged volume are all indicators of the market's momentum.
Advancing volume is the total volume for all securities who's price move
higher. Declining volume is the total volume for all securities that declined in
price. Similarly, unchanged volume is the total volume for all securities
that were unchanged in price.
There are two common measures for Upside/Downside
(Advance/Decline Volume):
- The Upside/Downside Ratio
- Upside/Downside Volume Line
Upside/Downside Volume Line
The upside/downside volume line is constructed by keeping a running total for
the difference between the daily volume in advancing and declining issues.
Normally, the Upside/Downside Volume Line will move up and down with the price.
When the upside/downside volume line doesn't confirm a price move (divergence),
a signal is given for a possible trend reversal. The Upside/Downside Volume line
shows the net flow of volume into or out of the market giving short-term
buy/sell signals, based on zero line crossovers. Like all such oscillators, the
greater the distance from the zero line, the greater the chances of reversal.
The Upside/Downside Ratio
The upside/downside ratio is calculated by dividing the daily volume of
advancing stocks by the daily volume of declining stocks. When the
upside/downside ratio is greater than 1.0, it is showing that there is more
volume associated with stocks that are increasing in price than with stocks that
are decreasing in price.
This indicator makes a good overbought/oversold indicator. Extremely high
values may indicate that the market is becoming overbought. Likewise, extremely
low values can indicate that the market is becoming oversold. The higher the
upside/downside ratio , the more bullish the signal: high readings above 4 could
be considered like a bullish signal, and low readings below .75 could be
considered like a bearish signal.
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