Introduction
The Volume Oscillator displays the difference between two
moving averages of a security's volume. The
difference between the moving averages can be expressed in either points or percentages.
You can use the difference between two moving averages of
volume to determine if the overall volume trend is increasing or decreasing. When the
Volume Oscillator rises above zero, it signifies that the shorterterm volume moving
average has risen above the longerterm volume moving average, and thus, that the
shortterm volume trend is higher (i.e., more volume) than the longerterm volume trend.
There are many ways to interpret changes in volume
trends. One common belief is that rising prices coupled with increased volume, and falling
prices coupled with decreased volume, is bullish. Conversely, if volume increases when
prices fall, and volume decreases when prices rise, the market is showing signs of
underlying weakness.
The theory behind this is straight forward. Rising prices
coupled with increased volume signifies increased upside participation (more buyers) that
should lead to a continued move. Conversely, falling prices coupled with increased volume
(more sellers) signifies decreased upside participation.
The following chart shows a Volume Oscillator.
The Volume Oscillator can display the difference between
the two moving averages as either points or percentages. To see the difference in points,
subtract the longerterm moving average of volume from the shorterterm moving average of
volume:
To display the difference between the moving averages in
percentages, divide the difference between the two moving averages by the shorterterm
moving average:
