|
 |
Technical Analysis, Studies, Indicators:
Volume Oscillator
Back to the List of
Studies
In technical
analysis the Volume Oscillator is used to reveal the difference
between two VMA (volume
moving averages) with the purpose of defining if the overall volume
trend is increasing or decreasing as well as with the purpose of
evaluating the magnitude of the volume surges (abnormal volume
activity).
The formula used to calculate Volume Oscillator is
Volume Oscillator = [Fast
VMA] / [Slow VMA]
Where [Fast VMA] is the shorter-term VMA and [Slow VMA] is the
longer-term VMA.
The Volume Oscillator is very similar to the
PVO (Percentage Volume Oscillator) with
the only difference that the PVO evaluates volume in the percentage scale (from
-100% to +100%) with 0% as a center line while Volume Oscillator evaluates
volume in the absolute numbers with 1 as a center line.
The same is with PVO, when the Volume Oscillator advances above 1, it reveals
that the shorter-term VMA is razing above the longer-term VMA. This means that
the short-term volume is higher than the average volume, over the longer-term.
Basically, Volume Oscillator above 1 shows that we have a volume surge
(increased volume activity) and this mathematically evaluates the magnitude of
this volume.
By analyzing volume oscillator in parallel with the price movement, a technical
analyst may define the nature of the volume surge as a panic selling or as a
greedy buying.
- When volume oscillator raises above 1 and the price of a
security drops, it indicates that the number of traders selling in panic
increases. The higher above 1 volume the oscillator is during the price
drop, the stronger panic selling we witness;
- When volume oscillator rises above 1 and the price of a
security moves up it indicates that the number of traders buying in greed
increases. The higher above 1 volume oscillator is during the price advance,
the stronger greedy buying we witness.
As a rule after periods of greedy buying and panic selling we
may see a reversal as a result of a shift in the supply/demand balance. While
the greedy buying could be spread over a prolonged period of time, the panic
selling as a rule is a process that does not exist for a long time and the
volume oscillator could be especially effective in defining the support levels
and buying points. A trading system based on the volume
technical analysis may
say to buy when the price of the security drops while the volume oscillator
starts to decline after being at a high level.
Chart 1: Volume Oscillator (S&P 500)
Volume based technical analysis is especially effective in the building
index trading
systems for trading index derivatives (QQQQ,
SPY, DIA...), trading index tracking funds (Rydex
index funds...).
|  |
|
Bookmark this
