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Volume Oscillator

Volume Oscillator

  1. Volume Oscillator Defined
  2. Volume Oscillator Divergences

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:

  1. 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.
  2. 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:

Volume Oscillator confirming price movement higher

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.

Next Page - Volume Oscillator Divergences

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