Vol Ratio — Volume Analysis Parameter

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What is Vol Ratio (Volume Ratio)?

The Vol Ratio (Volume Ratio) compares the current session’s trading volume to the stock’s recent historical average volume. It serves as a volume confirmation signal in the DCMM framework, providing context for whether the current price move is supported by unusual market activity or is occurring on normal/thin trading.

Calculation

Vol Ratio = Current Day Volume / Average 20-day Volume

Where “Average 20-day Volume” is the rolling 20-session mean volume, representing the stock’s baseline activity level.

A Vol Ratio of 1.0 means volume equals the 20-day average. Values above 1.0 indicate above-average volume; values below 1.0 indicate below-average volume.

Interpreting Vol Ratio in Drawdown Setups

Volume analysis during drawdown cycles provides critical insight into the nature and quality of the pullback:

High Vol Ratio during DD (Selling Climax Signal)

Vol Ratio > 1.5–3.0 during a drawdown: Indicates elevated selling pressure. This can be interpreted two ways:

  • Positive interpretation (Selling Climax): Heavy volume during a decline often signals panic selling that exhausts itself, creating a high-probability reversal. This is the classic “capitulation” pattern that often marks short-term bottoms in institutional stocks.
  • Caution signal: If the high volume persists across multiple sessions (DD=4+ with high Vol Ratio each day), it may indicate a fundamental change rather than normal cycle behavior.

Normal Vol Ratio during DD (Orderly Pullback)

Vol Ratio 0.5–1.2 during a drawdown: The decline is occurring on normal volume, suggesting a routine pullback rather than distribution. These setups typically have cleaner mean-reversion characteristics with fewer “surprise” continuation moves.

Low Vol Ratio (Thin Market Pullback)

Vol Ratio < 0.5 during a drawdown: The decline is happening on very thin volume. This can indicate:

  • No strong selling conviction — the pullback may resolve easily
  • Low liquidity risk — entry/exit may be harder to execute at target prices

Vol Ratio and Market Cap Context

DCMM also tracks Market curr. size (M) (current market capitalization) and Market avg. 20d (M) (20-day average market cap). These provide context for whether the volume change reflects a genuine behavioral shift or just normal market cap fluctuation due to price changes.

Volatility Scan

Related to Vol Ratio, the DCMM system includes a Volatility Probability Scan — a broader analysis of whether the current volatility environment is conducive to the mean-reversion strategy. The Vol Ratio is one input into this scan, along with ATR (14) and the Cycle Drop (%) to assess whether the current price move is consistent with the stock’s typical volatility profile.

Practical Use

  • Check Vol Ratio for each DD setup before entry
  • Prefer setups with Vol Ratio > 1.0 (above-average volume confirms the pullback is significant)
  • Very high Vol Ratio (>3.0) may indicate a capitulation bottom — high-conviction entry if combined with high Exp Score
  • Very low Vol Ratio (<0.5) may indicate a weak setup — volume should confirm the price move

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