volume oscillator - (VO)

Technical Analysis: Volume Oscillator (VO)

Volume Oscillator (VO): Definition, Features, Types, Trading, And Benefits

As a volume-based oscillator, one of the most important elements of market movements and trend dynamics, the Volume Oscillator allows traders to gain in-depth information about the trend on designated points with the support of moving averages. Through this comprehensive analysis, we have prepared for you at Eurotrader, you can quickly get extensive information about the definition of the Volume Oscillator, its features, how it can be used in trading, and its advantages and disadvantages!

What Does Volume Oscillator (VO) Mean?

The Volume Oscillator is an indicator based on the difference between two different moving averages, one short-term and one long-term, and provides traders with a comprehensive overview of the overall volume. The priorities of those who want to benefit from the Volume Oscillator include risk management by identifying major trends predicting possible trend reversals, and changing portfolio allocations in line with predicted price movements.

What Are The Key Features Of A Volume Oscillator (VO)?

In financial markets, volume is one of the most important technical indicators and one of the most important factors to be monitored by traders in any trade. Through volume-based oscillators, traders can obtain confirmation by taking volume into account in their trading decisions and strategies. In this context, the most prominent features of the Volume Oscillator include its use in detecting divergences, indicating overbought and oversold conditions, and providing various insights into the strength of the trend. 

What Are The Benefits Of The Volume Oscillator (VO)?

 

  1. Volume Confirmation: The Volume Oscillator provides traders with an insight into the momentum between price and volume movements. Using the VO to trade in situations where trend continuation or trend reversals are detected supports trading decisions thanks to volume confirmation.
  2. Detection of Divergences: Based on the two most fundamental dynamics of a financial asset such as volume and price, VO occasionally signals traders through divergences between price and volume. When prices are rising while volume levels are simultaneously falling, or when volume levels are rising while prices are simultaneously falling, these are referred to as divergences and provide traders with an early indication of potential trend reversals.
  3. Confirmation of Breakouts: When it comes to price breakouts, VO offers traders a confirmation as it also provides volume support. Increases in volume on trend breakouts indicate a more solid foundation for price action, reducing the likelihood of a fakeout, which is crucial for traders to make trades.

What Are The Limitations Of Volume Oscillator (VO)?

Lagging: Volume Oscillator, providing insights based on weighted price averages, does not produce real-time results and may not always reflect short-term market changes most accurately. 

Timeframes: The choice of timeframes is crucial to the results of the Volume Oscillator. In particular, very volatile price movements in short timeframes can sometimes lead to misinterpreted results of the VO. For this reason, traders need to choose timeframes that are suitable for their trading strategies.

Accuracy: VO, intended to inform traders about matters such as divergence and overbought and oversold patterns based on volume and price movements, does not, on its own, provide insight into the overall market. To avoid such situations, traders should always look for confirmation using other indicators and not rely on VO alone.

How Does The Volume Oscillator (VO) Work?

The Volume Oscillator is a very useful and well-known indicator that provides insight into current market conditions by averaging historical price movements. As with other volume-based oscillators, the idea that volume levels always move before price makes it crucial to evaluate volume movements to determine future price movements. 

Using the ratio obtained by subtracting the moving averages from each other, traders can make various trading decisions in line with their trading strategies. However, it is very important not to depend on only one indicator and to get confirmation from different indicators in all kinds of transactions.

How Is The Volume Oscillator (VO) Used In Technical Analysis?

Traders use Volume Oscillators in their technical analysis for many different reasons. The VO provides insights on many topics such as mismatches between price and volume, trend confirmations, and breakouts.

Divergences: As an oscillator based on the relationship between volume and price, the Volume Oscillator reveals divergences in case of an inverse correlation. For example, an increase in the VO value when prices are declining indicates a bullish divergence, while a decrease in the VO indicator when prices are rising is interpreted as a bearish sign.

Trend Confirmation: Financial assets can move in three different trends: uptrend, downtrend, and finally sideways trend. Volume is of great importance for confirmation of trend continuation or trend reversals. Traders who utilize VO can leverage the power of volume to make decisions about the strength and continuation of the trend.

Breakouts: Although the changes in the trend are referred to as breakouts, in financial markets, these trend changes can sometimes be fakeouts. To avoid such situations, VO is used to confirm possible breakouts with the support of volume. High VO levels support the breakouts that occur.

How Is The Volume Oscillator (VO) Measured?

The basis of the Volume Oscillator is to generate various trading signals on the data obtained by taking the weighted price averages of two separate time frames.

  • In the first stage of the calculation, the timeframe of the two moving averages is determined. The short-term timeframe is usually 5 days, while the long-term timeframe is usually 20 days.
  • In the next stage, moving averages are calculated on the previously determined timeframes.
  • On the calculated moving averages, the short-term moving average is subtracted from the long-term moving average to obtain the Volume Oscillator value. The formula used in the volume oscillator is as follows:

VO = Short-Term Moving Average – Long-Term Moving Average

What Are The Best Types Of Volume Oscillators (VO)?

Among volume-based oscillators, traders have many different options to choose from, and their preferred trading strategy can play a big role in selecting the technical indicator to use. Among the most famous volume-based oscillators are Chaikin Money Flow (CMF), Volume Weighted Average Price (VWAP), On-Balance Volume (OBS), Klinger Oscillator, and Accumulation/Distribution Line (ADL):

 1. Chaikin Money Flow (CMF)

Created by Marc Chaikin in the early 1980s, Chaikin Money Flow (CMF) is a technical indicator used to measure the levels of accumulation and distribution of a financial asset over time. CMF is similar to the Moving Average Convergence Divergence (MACD) indicator, using two different exponentially weighted moving averages to measure market momentum. 

A Chaikin Money Flow in the red zone is interpreted by traders as being in a downtrend, while a green zone can be a sign that prices are in an uptrend.

 2. Volume Weighted Average Price (VWAP)

Volume Weighted Average Price (VWAP) is an indicator used to determine the ratio between the cumulative price level and the cumulative volume of a financial asset over a specified period. In addition to the weighted average price, it also allows volume levels to be taken into account in trend detection. VWAP is often used as a tool to determine the direction of the price on intraday charts and, as with moving averages, assumptions are made that prices will rise when the price is above the VWAP and fall when the price is below the VWAP. 

 3. On-Balance-Volume (OBV)

The on-balance volume (OBV), a volume-based indicator, allows for the prediction of future price movements through the price-volume relationship by tracking the changing volume values during past price movements. According to the basic working principles of OBV, volume always precedes price, providing traders with several insights regarding the relationship between volume and price.

On-balance Volume was first introduced in 1963 by Joseph Granville in his book “Granville’s New Key to Stock Market Profits”. In Granville’s book, OBV was defined as an indicator for analyzing the volume believed to be behind all kinds of price movements. Granville states that even if there is a momentary difference movement during the rise or fall in volume, it will eventually affect the price.

4. Klinger Oscillator

First designed by Stephen Klinger in 1977, the Klinger Oscillator is a volume-based indicator used in financial markets to determine the direction of the trend and potential reversals in the markets. The Klinger Oscillator examines the relationship between price movements and volume. In this context, the volume shows how much a particular financial asset is traded in a unit of time.

 

In addition to showing trend directions, the Klinger Oscillator can also be used as a supportive indicator. Nowadays, the Klinger Oscillator acts as a way to confirm a breakout or breakdown when price movements such as trend movements, price channels, and triangle breakouts can change the current trend.

On the other hand, although Klinger Oscillator is a very important indicator that combines volume values with price movements, given that crossovers of price movements to certain regions occur very frequently, it is recommended to examine Klinger Oscillator in conjunction with various other indicators such as Stochastic Oscillator to make a definitive judgment as to whether the conclusions of Klinger Oscillator is precise or not.

5. Accumulation/Distribution Line (ADL)

Created by Marc Chaikin to measure volume flows in financial markets, the Accumulation/Distribution Line (ADL) is an indicator that allows the volume and price correlation of a financial asset to be analyzed to determine whether the asset is in an accumulation or distribution process. On the other hand, traders who have integrated the ADL into their strategies have the main objective of identifying mismatches between price and volume flows, thus revealing how strong the trend is.

What Common Mistakes Do Traders Make When Trading With The Volume Oscillator?

One of the most common mistakes traders make when using the Volume Oscillator is to rely on it too much. Although VO provides detailed information about volume and price correlation, it may not always be accurate. Instantaneous price movements can change the data on the indicator, which can lead traders to make wrong decisions in their trades. For this reason, it is always recommended to use VO in conjunction with other indicators.

Another common mistake when using VO is the choice of timeframes. Each timeframe provides traders with different insights. For example, changes in short time frames may not always affect long time frames. For this reason, the timeframe chosen for the analysis must be in line with the trader’s investment strategies.

 

FAQ

How can I add the Volume Oscillator to the charts?

The Volume Oscillator is available in the indicators section of many trading platforms. If VO is selected as an indicator to be displayed, it will automatically appear on the chart.

 

Can the Volume Oscillator be used on any timeframe?

Yes, the Volume Oscillator can be used on all timeframes, depending on traders’ strategies.

 

Can the Volume Oscillator be applied to all financial instruments?

Yes, the Volume Oscillator can be used for all financial instruments.

 

Is the Volume Oscillator suitable for all traders?

Volume Oscillator is an indicator suitable for traders of all levels, as it does not involve complex formulas and is easy to understand.

 

Does the Volume Oscillator always provide an accurate signal?

No, the Volume Oscillator tends to generate more accurate signals in trending markets and is always recommended to be used in conjunction with other indicators.

 

Disclaimer

Eurotrader doesn’t represent that the material provided here is accurate, current, or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their advice.

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