Technical Analysis, Studies, Indicators:
MVO (Market Volume Oscillator)
"Proudly invented, developed and implemented by people working at MarketVolume®"
The MVO was created by Victor Kalitowski for the MarketVolume.com in 2007 as an improved version of the PVO combined with Stochastics.
The MVO is based on the PVO (Percentage Volume Oscillator) and Stochastics, one of the most popular volume and price technical studies. Combining the power of two different indicators in one provides a means to analyze price and volume at the same time.
The PVO measures the relationship between two volume moving averages (VMAs) by revealing the volume surges (abnormal volume activity) that may lead to a trend reversal. It is commonly known that large volume surges are generated as a result of greedy buying or panic selling. The larger the volume surge is during a price move up, the more that greedy buying is taking place. The larger the volume surge is during a downward price move, the more extreme is the panic selling that we see. In the majority of cases, heavy greedy buying and extreme panic selling lead to a shift in supply and demand and changes in a market's mood and trend direction.
We call the shorter-term VMA the "fast VMA", while the longer-term VMA is called the "slow VMA". A PVO that is less than zero tells us that the Fast VMA is below a Slow VMA. In turn, this indicates that the volume at the analyzed point is below the average volume for a longer period of time and that there are no volume surges (no greedy buying or panic selling). A positive PVO indicates that the Fast VMA is above a Slow VMA and we see that the volume at the analyzed point is greater than the average volume for a longer period of time. The larger the positive PVO value is, the greater is the volume surge that we see. We can say that a positive PVO describes a level of panic selling and greedy buying. This indicator can be used to predict changes in the market trend.
The PVO is calculated as follows:
PVO = ([Fast VMA] - [Slow VMA]) / [Slow VMA] * 100%
PVO = ([Fast VMA] - [Slow VMA]) / [Slow VMA]
The problem with PVO is that the PVO value is not connected to the price and the PVO itself does not tell us at what market stage the volume surge occurs. In order to know how to interpret the PVO and volume surge, we need to know at what market stage this volume surge was generated. Was it during the price move up or during the price move down? Yes, when the PVO is plotted on the chart, we can visually evaluate the market direction, look at other technical indicators and tell what the analyzed volume surge represents. However, the PVO value itself tells us nothing more than the level of the volume surge (level of greedy buying or panic selling).
It becomes obvious that, in order to mathematically evaluate the PVO, it must be joined to price technical indicators that reveal the price direction or stage. For this purpose, we have used Stochastics. Stochastics compare an equity's latest closing price to its high/low range during a set number of periods:
Raw Stochastics = 100 * (Recent Close - Low(n)) / (High(n) - Low(n));
Basically, the PVO reveals how large the current volume surge (Fast VMA) is in relation to the average volume over a longer period of time (Slow VMA), whereas Stochastics show how far the current close is from the high and low of the analyzed period. Combining the PVO with a price indicator allows traders to more clearly see at which stage of the trend and which trend direction the volume surge appears, and thus enhance or attenuate it, while ignoring normal volume fluctuations. By using the PVO and Stochastics, we can tell how close to the most recent highs and lows the volume surge occurs and, accordingly, evaluate it as panic selling or greedy buying.
The MVO is calculated in several stages:
- In the first stage, the negative PVO is assigned to zero:
IF PVO is less the zero then PVO is equal to zero.
This says that, if the current volume is lower than the average volume over a longer period of time, it is ignored (the PVO becomes zero) and only volume surges (when the fast VMA is larger than the slow VMA) are considered in the MVO calculation.
We can say that the periods during which MVO equals zero indicate that there were no volume surges (no abnormal volume activity) during these periods.
- The next step is the Stochastics oscillator calculation. We apply the following formula to modify the Stochastics oscillator:
Stochastics Oscillator = (Stochastics Slow - 50) / 50
In this form, the Stochastics has absolute values in a range of minus 1 to plus 1 - or from minus 100% to plus 100%. This transforms Stochastics values into the range of the PVO values. In turn, this permits mathematical operations that involve both indicators to be performed.
As a negative Stochastics Oscillator shows that the recent close is closer to the low in the analyzed period, a positive Stochastics Oscillator shows that the recent close is closer to the high in the analyzed period. The closer the recent close is to the high or low, the closer the Stochastics Oscillator moves to plus 1 or minus 1. The closer the recent close is to the mid-point between high and low, the closer the Stochastics Oscillator moves to zero.
- In the last step the PVO is multiplied by the Stochastics Oscillator:
MVO = PVO * Stochastics Oscillator
Like the PVO, the MVO indicates the magnitude of the volume surges in relation to the past. The major difference between MVO and PVO is that the PVO is not connected to the price trend, whereas the MVO is directly connected to the price. This helps to better understand the relationship of the volume surge to the price movement and, therefore, to evaluate the analyzed volume:
- The positive MVO tells us that we have a volume surge that is close to the high in the analyzed period. It shows us the level of greedy buying;
- The Negative MVO tells us that we have a volume surge that is close to the low in the analyzed period. It shows us the level of greedy selling;
- A zero MVO indicates that the current volume is lower than the average volume during the analyzed period - no volume surges - no panic selling and no greedy buying.
As we can see, the Stochastics help us to mathematically evaluate the PVO. Another tip from Stochastics is that, if the equity's price is presently somewhere in the middle, between the high and the low (in the middle of the trend), the MVO will be moving to zero, even if we see a volume surge. This occurs because the PVO is stopped by the Stochastics Oscillator that is moving to zero in this case. As a rule, volume surges in the middle of a trend are not as important as they are when the price reaches new highs.
Chart 1: MVO (Market Volume Oscillator)
In summary: MVO reveals the magnitude of volume surges in relation to the trend direction, and thus enhances or attenuates it, while ignoring normal volume fluctuations.
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