Percentage Volume Oscillator (PVO) is momentum volume oscillator used in technical analysis to evaluate and measure volume surges and to compare trading volume to the average longer-term volume. PVO does not analyze price and it is based solely on volume. It compares fast and slow volume moving averages by showing how short-term volume differs from the average volume over longer-term. Since it does not care a trend's factor in its calculation (only volume data are used) this technical indicator cannot be used alone to predict changes in a trend.
Analysis of volume surges is one of the most important elements of technical analysis. Volume surge could be considered as abnormal trading activity. When average volume remains relatively unchanged you may say tat the traders are trading as usual - everything is normal. However, volume surge indicates strong increase in trading activity and there is only two factors that may cause such subnormal trading - it is either greedy buying if volume surge noted on the price up-side or panic selling when volume surge is noted on the price down-side.
Volume surges may lead to a condition when either buyers (bullish traders) or sellers (bearish traders) could become exhausted. Such events in technical analysis are called as overbought and oversold conditions respectfully. Overbought condition occurs when the buyers become exhausted and there are not enough buyers to sustain further move up. As a rule, it happens as a result of strong increase in trading activity (volume surge) when price moves up. Controversially, oversold condition occurs when sellers become exhausted and there are not enough bearish traders to push price lower. Oversold condition is usually a result of strong volume surges (abnormally high trading activity) during price decline. You may read more about relation between volume surges and overbought/oversold condition HERE.
Evaluating volume surges is a key element in building a trading system based on volume surges. For instance, a 1-day Volume Moving Average (VMA) that protrudes significantly above a 10-day VMA may be indicative of an abnormally high trading activity, which has the potential to lead to changes in the market's prevailing trend. One of our newest indicators is the Percentage Volume Oscillator (PVO). The PVO will assist you in evaluating the magnitude of VMA surges as they occur, thus enabling you to foresee probable changes in an index's prevailing trend.
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).
We are the only source who provides percentage volume oscillator for U.S. indexes and exchanges on daily and intraday level which allows to use it in the S&P 500,Russell 2000 and other indexes technical analysis and market timing.
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.
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 buying or bullish volume surges. Conversely, if such volume surges appear during a bearish market, we call them selling or bearish 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.
On the chart below you may see an example a reversal which occurred right after a strong volume surge to the price down-side. As you may see, panic selling lead to the condition when the sellers became exhausted and there were not enough sellers to push price further down. The Buyers that came to the market satisfied demands of sellers in panic and reversed the trend up.
Chart #1: S&P 500 chart - volume surge, fast and low volume MA and PVO
Trading strategies based on PVO
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] * 100%
By V. K. for MarketVolume.com