Volume Oscillator

Advertisement

Introduction

Oscillators are common primarily due to their ability to predict sideway movements. This doesn’t mean at all that Oscillators can only be used for Sideway Movements. Oscillators give a clear picture of the short term extreme positions i.e. Overbought and Oversold Situations. Similarly, Volume is considered as the second most important Technical Indicator. Volume acts as a Confirming Indicator for Price (Primary Technical Indicator). Volume can be measured in terms of shares, futures etc. It can be for Days, Weeks, Months or Years. Volume is the quantity of shares switched during a predetermined period of time. In this way, Volume measures the Upward, Downward, or Sideway Trend of the Prices of Shares in the Market. Volume will be low when prices of shares move sideway. Similarly, Volume will be high when Prices move in the upward or downward direction.

The Volume Oscillator (VO) is a Volume Based Technical Indicator that uses the difference between two Moving Averages of a Security’s Volume to determine future trends.  The Two Moving Averages are usually 5 and 20 Days Long for Future Markets. The Most common Figure of two moving averages is 14 and 28 days or weeks. The Long Period Moving Average acts as the base to determine shot Period Moving Average fluctuations. The difference between the short period and long period moving averages can be expressed in terms of points or percentages.

Calculation

There are two ways to calculate Volume Oscillator. The Outcome of the Indicator can be in terms of a Figure or a Percentage. In order to calculate VO in terms of a Figure, following formula is used:

Shorter Moving average - Longer Moving Average

In order to calculate VO in terms of a Percentage, divide the above formula by Shorter Moving Average and multiply the outcome by 100.

[ ( Shorter Moving Average - Longer Moving Average ) / Shorter Moving Average ] * 100

Advertisement

Calculation of Values of Histogram

In order to calculate the values of Histogram, use the following formula:

Volume Oscillator Histogram = Percentage Volume Oscillator – Single Line 

The Volume Oscillator determines Volume by determining the Relationship between two Different Moving Averages. The Outcome of above mentioned formula is then diagrammed as a histogram. The Shorter Moving Average is normally over a 14 days period whereas a Longer Moving Average contains data for 28 days. The Histogram, just like an oscillator, fluctuates up and beneath the Center Line.

Specifications

Volume plays a significant role in confirming a Strong or Weak Price Trend. A positive value on Histogram indicates that buyer pressure exists. Similarly, when there are negative values, it shows that a selling pressure exists. 

The Central Line on the Histogram of Volume Oscillator depicts neutral zone i.e. zero.  A Value plotted above the Central Line of Indicator idicates that the Short Term Volume is Greater than Long Term Volume.  Similarly, a Value below the Central Line depicts that Long Term Volume is Greater than the Short Term Volume. In order to evaluate the Volume Oscillator, watch out for the nonconformity of Price Activity with the VO Histogram. When Price Activity shows a buying pressure but VO disapproves further upward trend, then short term Volume is insufficient to boost higher prices. Soon after nonconformity, the Price Activity would follow Volume Oscillator Trend.  

Interpretation

Whenever a market is gaining its previous peak, the Volume Indicator should get up. When the market gains a Short Term extreme position, say overbought, the Volume Oscillator will immediately reverse its direction towards the Central Line. This change in direction happens before any Price Activity, that’s why Volume Oscillator is considered an important tool to predict future trends. But for instance, if the market isn’t going in vertical direction i.e. moving in horizontal direction, then the Volume Oscillator would show a contract in the volume of shares traded on the market. One shouldn’t forget that Volume increases as the number of shares traded i.e. Sell Off increases. Whenever Prices of Shares increase, along with a diminishing Volume depicts Bearish Trend. Similarly, when the prices are falling but the Volume is rising, it also shows that a bearish trend prevails in the market. 

Changeable Constants

The Number of days used to calculate the Exponential Moving Average may be entered subjectively. Most common values used for the Number of days used in Long Term Moving Average and Short Term Moving Average are 28 and 14 days. Positive Value of Volume Oscillator indicates a Strong Trend i.e. an upward or downward price trend. On the other hand, a Negative Value of Volume Oscillator indicates a Weak Trend. 

Advantages of Volume Oscillator

  1. One of the key benefits of using Volume Indicators like Volume Oscillator helps in pinpointing whether a Share is potentially moving upward or downward. Volume Oscillator signifies that a trend would continue to move in the same direction or change its direction after travelling some distance in a particular direction.
  2. Volume Oscillator precedes Price Activity in depicting possible change in direction of a particular stock. This happens when a Volume Oscillator shows nonconformity to Price Activity. This means that Upward or Downward trend is clearly evident on Volume Oscillator Histogram before it is manifested on Charts of Price Indicators.
  3. Volume Oscillator doesn’t any kind of exotic Mathematical Formulas and Calculations. It simply deploys a Exponential Moving Average of data for Predetermined number of days. 
  4. In order to predict market turnaround, Technicians must use both Price as well Volume Indicators. In order to determine the strength of a future trend, Volume Indicators like VO, PVO or MVO must not agree with the Price Indicators.

Disadvantages of Volume Oscillator

  1. Analysts believe that the biggest flaw in Volume Indicators including Volume Oscillator is that it uses a very limited span of time to predict future trends. Some believe that 14 and 28 days for Short Period Volume and Longer Period Volume respectively is a too conservative approach to the task.
  2. Volume Oscillators could be disordered by the fact that some shares aren’t traded constantly in the Market. This creates a Gap in the time span used for measuring Exponential Moving Average. This has its effect on the outcome of predictions made by the Volume Oscillator.
  3. Volume Oscillators can mislead investors and give wrong signals primarily due to the non transactional tenure of stocks in the past.
  4. Investors are unable to make decisions solely on the basis of outcomes of Volume Indicators because Price Indicators like Price Moving Average prove to be the main source of information.