How to identify percentage decliners

Summary - As much as investors have groaned through the volatility of the recent 12 months, it highlights a simple truth. Supply and demand cause movement in the stock market. This movement is known as volatility. Volatility has a negative connotation, but for investors, it can represent a significant trading opportunity because it helps to identify stocks that are the biggest winners and the biggest losers on the major indexes.

Every day, the market gives investors a scorecard that shows the stocks that are up and the stocks that are down. The winners are called the advancers and the losers are called decliners. The basis of determining which stocks are the biggest advancers or biggest decliners is based on the percent movement in stock price. For the purposes of this article, we're going to focus on the losers or percentage decliners.

The formula for calculating a security’s percentage loss is as follows:

Current price – previous close/previous closing price

So a stock that is currently trading at $25 after a previous day’s close of $28 would be showing a percentage loss of -10.7%. The calculation looks like this:

25-28/28 or -3/28 = -10.7%

Identifying percentage decliners is a form of technical analysis that traders use to find stocks with significant price movement. Historically, stocks with the biggest increase in price movement as a percent is one of the key metrics for ensuring profitable trades. However, because it is only measuring a moment in time, investors should look at other metrics such as trading volume to determine what percentage decliners make attractive trade targets. This is because, in addition to price movement, investors are looking for active stocks. Many stocks can show significant price movement but do so with low volume which can make it difficult to enter and exit a trade.

Introduction

Informed investors love data because it helps them identify potential trends. One of the key data points they use is the market’s daily advancers and decliners, which are also known as percentage gainers and percentage losers.

When decliners lead advancers, it indicates a negative day for the stock market. However, one limitation of percentage decliners is that, because they only indicate a moment in time, they are not always an accurate predictor of the market’s overall direction. In volatile markets, it’s not uncommon to have consecutive days where decliners lead advancers yet the market as a whole could still reflect strong underlying economic growth.          

To calculate percentage loss, the formula is:

Current stock price – Previous closing price/Previous closing price

So a stock that closed at $39 on Monday and was trading at $34 the next day would show a percentage loss as follows:

34-39/39 or -5/39 = -12.8%

Percentage decliners do not factor in trading volume. And although percentage decliners are typically associated with stocks, investors can track the biggest percentage decliners for almost any asset including things like the price of natural gas, oil prices, or currency prices. Many stock screeners allow investors to track the biggest gainers and losers on specific stock indexes including overnight markets.

This article will go into detail on percentage decliners. We’ll explain how to identify them, why they are important and where to find them so you can exercise profitable trades.

What are percentage decliners?

Percentage decliners are securities that are showing the biggest losses in terms of their percent change.

The formula for calculating a percentage loss is:

Current stock price – Previous closing price/Previous closing price

Although most commonly used in context with daily movement on the New York Stock Exchange (NYSE), NASDAQ, or S&P 500 Index, percentage decliners can be measured over any time period. For example, many stock screeners will allow you to apply a filter that can show the largest losers (decliners) for a week or year. In fact, many investors pay close attention to the stocks that show the biggest average decline for the past year to evaluate the stock as a potential buy.

Why are percentage decliners important?

Stocks, and other securities, that are percentage decliners are one measure of volatility. Although volatility can have a negative connotation it is necessary for profitable trading. When comparing two securities, the one that posts a greater percentage loss is considered to be the more volatile security. For example, a stock that drops $5 from its previous closing price of $30 day, a -16.7 percent loss, is more volatile than a stock that drops $5 from a previous close of $80, a -6.2% decline. However, just because a stock is one of the biggest losers does not necessarily mean it is a profitable trading option. In order for a percentage decliner to be profitable, it needs to show a significant active trading volume. Sufficient volume is what allows trades to be entered and exited easily and at the price that is needed. For example, some of the largest percentage decliners on a daily basis are obscure penny stocks. Because of their low price, these stocks can show massive percentage gains, but they are trading on very small volume.

How to identify percentage decliners

A stock screening tool (which can be found on most financial websites, including MarketBeat.com) has a series of drop-down menus that sorts stocks by specific groups including the stock exchange they are traded on (New York Stock Exchange, NASDAQ, S&P 500, Hang Seng, etc.), their market capitalization (e.g. small-cap, mid cap, large cap), price, or volume. Most menus will even allow sorting to be done by sector. This means, for example, if an investor is only interested in viewing small-cap technology stocks or large-cap consumer staples stocks with a trading volume of over 500,000 they can do that. At times, stocks and futures will see significant movement after the close of a trading day. As it relates to traders identifying percentage decliners, some traders will pay close attention to pre-market and after-hours trading because this is when companies engage in activities such as reporting quarterly earnings which can move a stock in either direction. Others will only pay attention to one group over another. Either way, traders are only concerned about looking for stocks that meet their criteria for both percentage gain and trading volume during a defined window when they are looking to execute their trade.

The limitations of percentage decliners

As we’ve pointed out in this article, percentage decliners are not a standalone measurement of a profitable trading opportunity. A stock or security must have both price movement and a high volume traded to be considered a good opportunity. Percentage decliners also tend to be growth stocks, which is logical since mature stocks, such as blue-chip stocks, are known for being able to maintain more stable prices even during times of volatility. Another limitation of percentage decliners is that the decline is noted without context. Simply understanding how much a stock is declining does not tell an investor why its shares fell. This is why investors need to continue to do other research on the stock to understand all the factors influencing the stock. 

Percentage decliners and efficient market dynamics

The “efficient stock market theory” states that everything about a stock is already factored into its price. Therefore, the idea of investors chasing a return (i.e. jumping on the biggest gainers or selling the biggest decliners) shouldn’t work. And over the long run, that’s probably true. However, short-term traders often can make a profit by capitalizing on the trend of securities. When they’re up, they can ride the trend higher and when they’re down, they can profit through shorting the stock.

However, the idea of “buying high and selling low” is not limited to active traders.  In a 2002 study titled Prospect Theory: An Analysis of Decision Under Risk, psychologist Daniel Kahneman developed the concept of “loss aversion” which means that investors feel more pain from their market losers than they do pleasure from their market gainers.

Kahneman and his long-time collaborator Amos Tversky also developed the theory that when making decisions, individuals tend to allow the most recent data they receive to have a disproportionate effect on their forecasts and judgments. This challenges the theory of an efficient market because it spawns the “herd mentality” where buyers will bid up stocks that are showing the highest gains and selling the ones that are showing the largest declines.

However, this is where conventional market dynamics can get thrown out the window. That's because along with the role of supply and demand, markets are also driven by the psychology of investors. These investors tend to buy the biggest winners and sell the biggest losers.

How to profit from percentage decliners

Of course, there is still a sound rationale for buying low and selling high. In fact, for long-term, "buy and hold" investors this is still the unmatched formula for success. In today's market that requires investors to be a bit contrarian at times. A contrarian is able to use fundamental and technical analysis to purchase stocks that have fallen out of favor, then selling them for a profit as they rebound.  Investors that look to profit from “buying on the dips” are using a technical analysis concept known as mean reversion.

Mean reversion is rooted in behavioral psychology. Everything from weather to human emotions can have periods that exhibit extreme behavior. For the most part, however, this behavior is simply not sustainable. Temperatures and precipitation go back to normal levels and even the most active life will go through a return to a more manageable schedule.

By suggesting a stock (or other security) is reverting to the mean means that a stock will try to find a steady range to trade in. When events arise, such as a negative earnings report, declining quarterly sales, a product recall, or job cuts the stock will move out of its steady range and like a rubber band be stretched to an extreme level. In the case of negative events, that means the pressure will be to move the stock price lower. However, when stocks get the most stretched, they will tend to snap back to the steady state. This is what contrarian investors are counting on – this reversal of prices.

While buying stocks that are among the biggest decliners can be profitable, there are times when the stock will continue to underperform. Therefore, another way to profit from percentage decliners is by shorting the stock. Short selling is a riskier form of investment often because it requires investors having a leveraged portfolio. This means that they use borrowed money, in the form of a margin account at a brokerage, to “sell” the stock without owning it. If their analysis is correct and the stock continues to fall, they can purchase the stock at a lower price and make a profit from the difference.

The final word on percentage decliners

Percentage decliners offer important data for traders who are looking to profit from the price action of volatile stocks and futures. A percentage decliner is a stock that has seen its price fall the most as a percent in relation to its previous closing price. The formula for percentage gain is the difference between a stock’s current price and its previous close divided by the previous closing price. Because the market is not static, percentage decliners continue to change even in after hours or pre-market trading. In fact, many traders use these periods to identify securities that are setting up for profitable trades. 

Like many forms of technical analysis, performance decliners need to be evaluated along with other market data such as trading volume in order to determine the securities that have the best trading possibilities. A stock that has a share price of $20 will be able to make a large percentage move on less volume than a stock trading at $100. However, for a trader that is looking to enter and exit a trade quickly, they may find it difficult to trade at the price they want if the stock is trading at low volume, which signals low demand for the stock.

While commonly thought of in terms of stocks, investors can find performance decliners for virtually any asset class including commodities and futures. Many stock screening tools allow investors to get very precise – even allowing them to look at gainers by sectors or by volume. In this way, traders can customize the data to fit the criteria that they find most beneficial. Trading percentage decliners fit the traditional notion of buying low and selling high because of the theory that most stocks – similar to weather patterns and life events – will seek to find a stable state. In that way, buying stocks that show the biggest declines are often the ones with the biggest upside potential.