Volume Oscillator

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Patent #: US 7,831,984 B2
MarketVolume®'s technology of displaying and presenting intraday volume and volume based technical indicators is protected by copyright law and patent. Unauthorized distribution or reproduction of proprietary technologies will be prosecuted to the maximum extent possible under the law.

In technical analysis the Volume Oscillator is used to reveal the difference between two VMA (volume moving averages) with the objective of determining whether the overall volume trend is increasing or decreasing, as well as evaluating the magnitude of the volume surges (abnormal volume activity).

The formula used to calculate the Volume Oscillator is

Volume Oscillator = [Fast VMA] / [Slow VMA]

The Volume Oscillator is very similar to the PVO (Percentage Volume Oscillator). The only difference is that the PVO evaluates volume on a percentage scale (from -100% to +100%) with 0% as a center line whereas the Volume Oscillator evaluates volume in absolute numbers with 1 as a center line.

As with the PVO, when the Volume Oscillator advances above 1, it indicates that the shorter-term VMA is rising above the longer-term VMA. This means that, over the longer term, the short-term volume is higher than the average volume. Basically, a Volume Oscillator above 1 shows that there is a volume surge (increased volume activity) and this mathematically evaluates the magnitude of this volume.

By analyzing the volume oscillator in parallel with the price movement, a technical analyst can describe the nature of the volume surge as panic selling or as buying motivated by greed.

• When the volume oscillator rises above 1 and the price of a security drops, it is indicating that the number of traders selling in panic is increasing. The higher that the volume oscillator is above 1 during the price drop, the stronger is the panic selling that we are witnessing;
• When the volume oscillator rises above 1 and the price of a security moves up, it means that the number of traders buying in greed increases. The higher that the volume oscillator is above 1 during a price advance, the stronger is the greed-motivated buying that we are witnessing.

As a rule, we can see a reversal as a result of a shift in the supply/demand balance after periods of greedy buying and panic selling. While the greedy buying can continue over a prolonged period of time, panic selling as a rule is a process that does not last a long time and the volume oscillator can be especially effective in defining the support levels and buying points. A trading system based on volume technical analysis may tell you 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 building index trading systems for trading index derivatives (QQQQ, SPY, DIA...) and trading index tracking funds (Rydex index funds...).

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