Volume Oscillator

Description

The Volume Oscillator displays the difference between two moving averages of a security's volume. The difference between the averages can be expressed in either points or percentages.

Interpretation

As volume levels are increasing, shorter-term volume moving averages will rise above longer-term volume moving averages. This is similar to how shorter-term price moving averages rise above longer-term price moving averages when prices are increasing.

Thus, the difference between two volume moving averages of varying lengths (i.e., this indicator) can be used to see if overall volume trends are increasing or decreasing. When the Volume Oscillator rises above zero, it signifies that the shorter-term volume moving average has risen above the longer-term volume moving average, or that the short-term volume trend is higher (i.e., more volume) than the longer-term 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 increased downside participation).