Volume Oscillator

Definition

The Volume Oscillator is an indicator made up of two Moving Averages (MA) surrounding volume, one being fast and the other slow. The fast volume MA value is then subtracted from the value of the slow Moving Average. The Volume Oscillator measures volume by analyzing the relationship between the two Moving Averages mentioned.

Calculation

The Volume Oscillator indicator calculates both a fast and slow volume moving average, which are set at different default settings. The fast volume Moving Average has a default setting of 14, meaning a period of 14 days or weeks. The slow volume Moving Average, on the other hand, has a default setting of 28, meaning a period of 28 days or weeks. 

Takeaways

The Volume Oscillator indicator oftentimes uses volume analysis to determine its values. Let’s dig a little deeper into two of these principles.

First, let’s analyze how an increase or decrease in price along with an increase in volume could potentially signal trend strength. In this case, it is key to analyze and follow the fast volume MA. If it is above the slow volume MA and the Volume Oscillator is above the zero line, the result may confirm price direction and market trend, whether it is in an uptrend or downtrend.

Next, we can look at how an increase or decrease in price along with a decrease in volume could potentially signal trend weakness. In this case, it is key to analyze and follow the fast volume MA. If it is below the slow volume MA and the Volume Oscillator is below the zero line, the result may warn the trader that price direction and the general market trend are weak.

What to look for

When there’s a noticeable increase in price, Volume Oscillator divergences can occur. These divergences often come with a decrease in general volume, which traders should be acutely aware of. When a divergence occurs, the fast volume MA is reportedly below the slow volume MA, and the Volume Oscillator is shown to be below the zero line Divergences, especially in cases like the one above, can often serve as a warning to traders and signal that current price direction is weak and there may potentially be a trend reversal in the near future.

The trader will see the resulting histogram fluctuate above and below the zero line, which helps project insights into the price trend and determine whether or not its direction is strong or weak. Positive values are plotted above the zero line and they suggest that there is enough existing market support for the price to continue its current trend direction. Negative values, on the other hand, are plotted below and suggest that there is a lack of market support, which points towards price being stagnant or hinting towards trend reversal.

Limitations

It is always best to use multiple technical analysis indicators rather than sticking to a solid one indicator. You wouldn’t want to rely on a single indicator for market analysis, which is why we suggest using multiple indicators to aid your trades. At the end of the day, no single indicator can be 100% reliable, so make sure you protect your money and interests by using various tools to get you to where you’d like to be.

Summary

The Volume Oscillator is a helpful technical analysis indicator that projects the strength or weakness of price trends. By analyzing volume, traders are able to determine more potential trades and may find that this indicator, in addition to other trend-oriented indicators and tools, are good to have in your back pocket. 

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