Key takeaways
– The upside/downside (up/down) ratio is a breadth indicator that compares total traded volume in advancing issues to total traded volume in declining issues on an exchange.
– Values > 1 indicate more volume in advancing issues (bullish bias); values 1: More volume on advancing issues — bullish market breadth.
– Ratio = 1: Balanced volume between advancing and declining issues.
– Ratio 1.2–1.5; sell/short bias when < 0.8–0.5.
– Contrarian signals: extremely low values (e.g., 2.0) can suggest overbought conditions.
Smoothing and signal rules
– Use an N-day SMA (e.g., 3–10 days) on the ratio to filter intraday/noisy swings.
– Example signal:
• Bullish confirmation: Ratio > 1 and Ratio crosses above its 5-day SMA.
• Bearish confirmation: Ratio 1.5).
5. Combine with confirming indicators:
• Trend confirmation: moving averages of the index/stock price.
• Momentum: RSI, MACD, or stochastic oscillator to avoid buying into overbought extremes.
• Breadth confirmation: advance-decline line or percent of stocks above moving average.
6. Define entry, stop-loss, take-profit, and position sizing rules.
7. Backtest the strategy on historical data across multiple market regimes.
8. Monitor and adjust thresholds after evaluating performance and risk metrics.
Example trade setups
– Momentum-filtered long:
• Entry: Stock breaks out and market-level upside/downside ratio > 1.5 and above its 5-day SMA.
• Stop: below breakout level or a fixed ATR multiple.
– Contrarian buy:
• Entry: Market approaching major support; ratio < 0.5 and RSI Open: Advancing_Volume += Volume
• Else if Close < Open: Declining_Volume += Volume
3. Ratio = Advancing_Volume / max(Declining_Volume, tiny_epsilon)
4. SMA_Ratio = SMA(Ratio, N)
– Many platforms and data vendors provide an "up/down volume" indicator; check consistency of definitions (close vs previous close, or close vs open).
Tips
– Use the ratio as a market-breadth filter rather than a stand-alone buy/sell trigger.
– Combine extremes in the ratio with price patterns and momentum divergences for higher-probability trades.
– When backtesting, test robustness to different threshold values and smoothing windows.
– Watch for days when a few mega-cap names dominate volume — consider weighting or excluding them in a custom universe to reduce skew.
Important
– The upside/downside ratio is a useful breadth measure but is not infallible. It indicates where trading volume is concentrated (advances vs declines) and should be one input among many in a trading plan. Always practice prudent risk management.
Sources
– Investopedia — Upside/Downside Ratio
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.