Volume Tutorial:
Volume Oscillator
The volume oscillator measures the
relationship between 2 volume moving averages (VMAs), showing the
divergence between two 2 VMAs with different settings. We call the
shorter-term VMA the "fast VMA" (VMA1 on IV chart); the longer-term VMA is called the "slow
VMA" (VMA2 on IV chart).
The formula for calculating the volume
oscillator is:
Volume Oscillator =
[Fast VMA] - [Slow VMA]
Accordingly, a percentage volume
oscillator (PVO) can be derived from the above formula; it is calculated as
follows:
PVO = ([Fast VMA] -
[Slow VMA]) / [Slow VMA]
The VMA itself shows the average volume
over a specific timeframe. By calculating and charting the difference between a
slow and a fast VMA, you can determine the extent to which the fast VMA trades
above or below the slow VMA. This provides an indication of the intensity of
short-term trading activity compared to the average trading activity over a
longer time span.
For instance:
Assume that on June 17, 2005, you
analyze the S&P 500 index using a 1-day VMA as the fast VMA and a 10-day VMA as
the slow VMA. Assume you find that the:
-
1-day VMA has a value of 2,394,012 K
of shares;
-
10-day VMA has a value of 1,780,324
K of shares;
-
Volume oscillator (1/10) is 613,688
K;
-
and the PVO value is 34.5%.
By reviewing volume oscillator values,
you can draw the conclusion that the trading activity on the S&P 500 on June 17
exceeded the average trading activity established over the past 10 days by
34.5%. On June 17, the S&P 500 gained 0.78%. As a result of the selling volume
surge seen on that day, the S&P 500 proceeded to decline by almost 2% over the
next few days.
The volume oscillator allows a
mathematical evaluation of volume surges. Using this tool, you can gauge the
impact a volume surge might have on the market. Large positive oscillator values
are indicative of significant volume surges. If such volume surges occur while
an index is trending higher, they are by our definition “selling volume
surges”. Conversely, if such volume surges appear during a bearish market, we
call them “buying volume surges” (for further details on these definitions,
please refer to our
Chart School). By further analyzing the corresponding volume oscillator
values, traders can evaluate to what degree a particular surge is likely to
impact the market - over the short-, mid-, and long-term.
The chart below shows an example of an
intraday volume oscillator. Two VMAs are compared: a 15 minute VMA as the fast
VMA, and a 1-day VMA as the slow VMA.
| Chart #1: |
Example of an intraday volume
oscillator. S&P 500 index. April 22, 2005. 15 minute = fast VMA;
1-day = slow VMA. |
 |
The above example clearly shows how the peak value of the
volume oscillator corresponds to the point at which the index reverses its trend
from down to up.
The PVO value provides an indication as to the magnitude of a
particular volume surge. Basically, it shows how high the 15-minute VMA surged
in relation to the daily average volume (1-day VMA). You can see this on our
regular volume charts as well; however, because each day’s average volume output
varies, it is difficult to evaluate volume surges or to compare them to surges
in the past. The benefit of the PVO value is that it is amenable to comparisons
- it represents a percentage value. By using the PVO, you can
analyze
volume surges in the past, establish critical PVO values where the trend is
most likely to reverse (over various timeframes), and
build a
trading system that best fits your trading style.
For the study of volume surges over various timeframes, we
recommend the following VMA settings. Please note that the settings may also
vary depending on your personal trading style:
Table #1:
Recommended VMA settings
|
Period
|
SBV
VMA Period
|
Fast
VMA
|
Slow VMA |
1 bar
value |
 |
|
|
|
|
|
Intraday
Indicators |
|
2-Hour Period
|
1-20 bars |
1-20 bars |
40-100 bars |
1 minute |
|
1-Day Period |
5-30 bars |
5-30 bars |
60-100 bars |
1 minute |
Short-Term Indicators |
|
5-Day Period |
7-25 bars |
7-25 bars |
70-200 bars |
5 minutes |
|
15-Day Period |
7-25 bars |
7-25 bars |
70-200 bars |
15 minutes |
|
30-Day Period |
7-25 bars |
7-25 bars |
70-200 bars |
30 minutes |
|
60-Day Period |
7-25 bars |
7-25 bars |
70-200 bars |
1 hour |
Mid-Term Indicators |
|
3-Months Period |
3-8 bars |
3-8 bars |
40-80 bars |
1 day |
|
6-Months Period |
3-8 bars |
3-8 bars |
40-80 bars |
1 day |
|
1-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
1 day |
|
1.5-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
1 day |
|
2-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
2 days |
Long-Term Indicators |
|
3-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
3 days |
|
4-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
3 days |
|
5-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
5 days |
|
7-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
7 days |
|
10-Year Period |
3-8 bars |
3-8 bars |
40-80 bars |
10 days |
|
Weekly |
3-8 bars |
3-8 bars |
40-80 bars |
1 week |
|
Monthly |
3-8 bars |
3-8 bars |
40-80 bars |
1 month |
|
|
Before you apply the volume oscillator as a trading indicator, we suggest that
you browse through our chart history. This will help you determine the best
settings for both the fast and the slow VMA, and it will as assist you in
establishing at which PVO levels trend reversals are most likely to occur.
An example to illustrate the above:
Assume a trader makes 1 - 2 trades per week. He or she could use a 1-day and a
10-day VMA and define a PVO alert level of 20%. If this trader then sees a
volume surge on a 15-day chart and a PVO of (1/10) – meaning the fast VMA (i.e.,
the 1-day) VMA is trading 20% above the slow (i.e., the 10-day) VMA – there is a
good chance the market will soon reverse its current trend, at least for the
short-term.
July 2005
A. v. S.
V. K.
Copyright 2004 - 2005 Highlight Investments Group.
All rights reserved. This material may not be
published, broadcast, rewritten, or redistributed.
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