The Volume Oscillator consists of two moving averages of volume, one fast and one slow. The fast volume moving average is then subtracted from the slow moving average.
The Volume Oscillator is often interpreted using the same principles as volume analysis:
- An increase or decrease in price accompanied by an increase in volume may be considered a sign of strength in the prevailing trend. Therefore, when the fast volume moving average (default 14-period) is above the slow volume moving average (default 28-period), the Volume Oscillator is above the zero line and may be confirming price direction, whether it be up or down.
- An increase or decrease in price accompanied by a decrease in volume may be considered a sign of weakness in the prevailing trend. Therefore, when the fast volume moving average is below the slow volume moving average, the Volume Oscillator is below the zero line and may be warning that the price direction is lacking strength and conviction.
An example of the Volume Oscillator is presented next in the chart of the E-mini Russell 2000 Futures contract:
The fact that price is making higher highs and higher lows might be viewed by many traders as a bullish sign. When the price increases in the Russell 2000 e-mini is combined with the Volume Oscillator making higher highs and higher lows, a trader may consider this to be even more bullish.
The Volume Oscillator can be used as a confirmation indicator, as it was above with the Russell 2000 e-mini future, or it can be used to detect divergences, as will be discussed on the next page.
Volume Oscillator Divergences
Volume Oscillator divergences occur when there is an increase or decrease in price which is accompanied by a decrease in volume. When this divergence occurs, the fast volume moving average (default 14-period) is below the slow volume moving average (default 28-period) and the Volume Oscillator is below the zero line. These divergences might act as warnings that the current price direction is lacking strength and there might be potential for a trend reversal.
An example of a Volume Oscillator divergence is presented below in the chart of the E-mini Russell 2000 Futures contract:
When the price was increasing in the Russell 2000 e-mini, the Volume Oscillator was not confirming the price movement because it was decreasing, making repeated lower highs and lower lows. This bearish divergence indicated that the recent price increases were not being made with volume strength. The bearish divergence was confirmed when the e-mini future's upward trendline support was broken.
However, when the Russell 2000 e-mini futures contract made its downturn, the Volume Oscillator confirmed the price downtrend by making higher highs and lower lows, a signal that volume was increasing and thus suggesting that the trend downward had strength.
The Volume Oscillator could be useful to any technical trader's toolbox. Analyzing volume gives traders another viewpoint for analyzing potential trades. To learn more about interpreting volume, see: Volume.
How to Get Started Trading
If you are interested in trading, have a look at our reviews of these regulated brokers available in to learn which charting tools they offer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.