What Is the Upside/Downside Ratio?
Let me explain the upside/downside ratio to you—it's a market breadth indicator that reveals the relationship between the volumes of advancing and declining issues on an exchange. You, as an investor, would typically use this to figure out the market's momentum at any point.
This ratio is basically a twist on the advance-decline ratio (ADR), which looks at the number of stocks closing higher versus lower compared to their previous day's close, but here we're focusing on trading volume instead of just counts.
Key Takeaways
Here's what you need to know: the upside/downside ratio measures the volume traded in advancing versus declining issues on a given day. On its own, it can show you if the market is overbought or oversold. If you track its trend, you'll see whether the market is leaning bullish or bearish.
The Formula for the Upside/Downside Ratio
You calculate the upside/downside ratio like this: it's advancing issues divided by declining issues, where advancing issues are the total volume traded of securities that close above their opening price, and declining issues are the total volume of those closing below their opening price.
Understanding the Upside/Downside Ratio
In technical analysis, spotting directional changes is key to your success, and that's where the upside/downside ratio comes in—it's an effective tool to quickly sense potential trends or reversals of current ones.
I often smooth this ratio with a simple moving average to filter out minor fluctuations. The indicator goes above 1 when advancing volume beats declining, and below 1 when it's the other way around.
Tip
Just so you know, the upside/downside ratio—also called the up/down volume ratio—is available as a technical indicator on many trading platforms.
Trading With the Upside/Downside Ratio
You can use this ratio in different ways, starting with contrarian strategies. It helps gauge overbought and oversold market conditions—low values suggest oversold levels, high ones point to overbought.
For instance, if the ratio is below 1, you might look for buy entries in stocks nearing key support like long-term trendlines.
If you're a momentum trader following the trend, use the ratio to confirm institutional support in the broader market. You could filter trades by only buying when it's above 1.5 or shorting below 0.5.
Important
Remember, you should always pair the upside/downside ratio with other technical indicators when crafting your trading strategy.
Special Considerations
Consider using indicators like the relative strength index (RSI) or stochastic oscillator alongside this ratio to check for extreme overbought or oversold states that might lead to price corrections.
For example, if the ratio is below 0.5 and RSI is under 30, it might be wise to hold off on short positions until a short-term retracement happens.
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