The Volume Oscillator indicator is a volume-based technical indicator. This indicator works on the technical premise that it is not the actual level of volume, but the change in volume relative to the recent past that has more technical significance.
A volume oscillator defines volume by measuring the relationship between two MA (moving averages). Volume determines the strength or weakness of a price trend. This is a technical analysis indicator. Traders use it for identifying periods of expanding or contracting volume.
There are some basic and easy ways by which one can read the volume oscillator. A rising volume oscillator indicates a rallying market. In another way, when an issue becomes overbought, the oscillator reverses its direction. And if the market moves in a horizontal direction, the volume should contract.
The particular volume oscillator indicator calculates a fast and a slow volume MA (moving average). The difference between the two (fast VMA -slow VMA). It is then plotted as a histogram. The fast VMA is generally over a period of 14 days or weeks.
Volume Oscillator = [(Shorter Period SMA of Volume – Longer Period SMA of Volume) / Longer Period SMA of Volume ] * 100
Features of the Volume Oscillator
- Just remember that changes in volume are being measured, and generally, the volume expands during a sell-off.
- Another important thing is an increasing price, along with declining volume, is the maximum time, without exception, bearish.
- When there is a positive reading for the particular volume oscillator, in the short term there is strength in the direction of the primary trend.
How to Set Up the Volume Oscillator on Charts?
On Zerodha Kite
The traders can attach the Volume Oscillator indicator from the STUDIES section of Zerodha Kite. The traders can also find it in Kite Mobile App. The Short Cycle is 12 and the Long Cycle is 26. If you want to change these values of Short and Long Cycle then you can change it. This indicator is available includes daily, weekly, monthly, or intraday. The traders can also check the attaching process of the Volume Oscillator indicator to the Reliance Industries share price chart.
On Other Trading Platforms
Now, we are going to present charts of CIPLA and ADANI PORTS with Volume oscillators, taken from Upstox Pro and FYERS platforms.
Whenever you see an increase in volume, market strength is in the maximum position. Here, the fast volume moving average is below the slow volume which means VO is below the zero lines and the market lacks strength and conviction.
How to Trade the Volume Oscillator?
One part of this the Volume will be low when the prices of shares move sideways. As same as Volume will be high when Prices move in the upward or downward direction. In the Volume Oscillator (VO) indicator the difference between the short-period and long-period moving averages can be expressed in terms of points or percentages of the Volume Oscillator indicator.
An increase or decrease in asset price accompanied by an increase in volume can be considered a sign of strength in the current trend. Hence, if the fast VMA or volume moving average (default 14-period) is above the slow volume moving average (default 28-period), the VO is above zero levels. And can be determining price direction, whether it be up or down.
So, a positive value on the Histogram indicates that buyer pressure exists for this indicator. Mainly, when there are negative values, it shows that a selling pressure exists in the Volume Oscillator indicator. The central line on the histogram of the Volume Oscillator depicts a neutral zone of zero.
Here, I add Stochastics along with the volume oscillator. I take the buy signal when the volume is above and the stochastics fast line is above the slow line. Oppositely, the sell signal appears once the volume is going down and Stochastics’ slow line is above the fast line.
If the price doesn’t match the oscillator, it creates a divergence. Like here, the price made higher highs but the indicator made lower lows, and a bearish divergence occurs. And, the price went down later.
Advantages and Limitations of Volume Oscillator
- Mainly the key benefits of using Volume indicators like Volume Oscillator helps in pinpointing whether a share is potentially moving upward or downward.
- The indicator signifies that a trend would continue to move in the same direction or change its direction after traveling some distance in a particular direction.
- The indicator precedes Price Activity in depicting the possible change in the direction of a particular stock.
- The calculation of this simply deploys an Exponential Moving Average of data for a predetermined number of days.
- In order to predict the market turnaround, technicians and analysts must use both Prices as well as Volume indicators side-by-side.
- In order to determine the strength of a future trend, Volume Indicators like VO, PVO, or MVO must not agree with the Price Indicators among all the indicators.
- The biggest flaw in Volume indicators including Volume Oscillator is that it uses a very limited span of time to predict future trends.
- Volume Oscillator indicator could be disordered by the fact that some shares aren’t traded constantly in the Market.
- In this indicator, Volume Oscillators can mislead investors and give wrong signals primarily due to the non-transactional tenure of stocks in the past.
- Traders are unable to make decisions solely on the basis of outcomes of Volume Indicators.
In conclusion, the Volume Oscillator is a powerful indicator for monitoring market momentum and assessing the strength of a trend. We can use it in both short-term and long-term trading strategies to provide an accurate indication of when it may be wise to enter or exit positions depending on whether buying or selling volumes are dominating. While interpreting the signals generated by this indicator may require some practice, traders should find its indicated trend reversals helpful in making more informed decisions regarding their trades.