Most traders call turns in market direction in low market volume, resulting in significant losses. The rule of thumb is always that a market move is invalid without substantial volume. Chartists monitor volume to determine activity in the markets before placing a trade.
Therefore, volume is an essential concept in the financial markets. In this post, DGM Tech Solutions highlights the volume oscillator indicator.
What is a Volume Oscillator?
A volume oscillator is a technical analysis indicator that determines the strengths and weaknesses of a market trend by measuring the relationship between two moving averages (MA).
Traders use the volume oscillator to identify periods when the market volume is increasing or decreasing to identify potential trade opportunities.
How Does it Work?
The difference between the two volume MAs determines whether the prevailing volume trend is increasing or decreasing. When the volume oscillator rises above zero, the short-term volume moving average is usually above the short-term moving average, indicating a rising price.
Conversely, if the oscillator falls below zero, the short-term volume moving average crosses below the short-term moving average, implying the price has fallen.
Volume Oscillator Calculator
The volume oscillator calculates the fast-moving volume average minus the slow-moving average, plotted on a histogram. Usually, a fast-moving average measures 14 periods, while a slow-moving average measures 28 periods.Volume Oscillator Indicator | Indicator Series Click To Tweet
How to Use the Volume Oscillator
Traders can use the volume oscillator in the following ways:
To read divergence: Divergence signals that the current price trend is weakening and that a reversal may occur. Looking for divergence between the volume oscillator indicator and price can help traders predict potential trend reversals.
To identify a trend: Seasoned traders use momentum to identify a short-term trend. Momentum shows the rate at which market prices change. Traders can then use their knowledge of momentum to make trading decisions.
Confirm a trading strategy: The volume oscillator indicator can confirm if a setup is valid before placing a trade. When the momentum shown by the indicator aligns with other rules or indicators, you may have more reasons to take a trade. (Play around with tradingview’s advanced charts for free).
However, as with any other indicator, the volume oscillator is not 100% reliable. The indicator may stay in an overbought or oversold region for a long, giving a false signal. Volatile market conditions may also cause the indicator to give inaccurate information. Therefore, it’s best used with other indicators or trading strategies for more confluence.
Technical analysts need to learn tricks that can help them build a stronger edge. The volume oscillator indicator is a highly effective tool for measuring market momentum, which is necessary for profitable trading. Traders can use the volume oscillator with technical or fundamental analysis tools for improved expectancy. DGM Tech Solutions offers a series of trading tools to help take your trading to the next level. Contact us to learn more about our services.