Finding the right indicators and tools to stay ahead in the ever-evolving trading market is critical. One such technical indicator that has stood the test of time and remains popular among traders even today is the Klinger Volume Oscillator (KVO).
It is a volume-based oscillator that measures the direction and strength of price action by analyzing volume and price data in a market. It helps determine the magnitude of a trend’s ascent and spot possible trend price reversals. Traders can employ it to confirm short-term fluctuations and long-term money flow.
In this article, we shall discuss the Klinger Oscillator in detail and how to use it effectively to boost your profits while trading.
What is the Klinger Oscillator?
The Klinger Oscillator, also called Klinger Volume Oscillator, is a technical analysis indicator that examines how price action and volume interact in financial assets. This indicator, created in 1977 by seasoned trader and analyst Stephen Klinger, tries to determine the direction and strength of price trends. It is based on the concept of how volume flows through an asset and how it affects short-term and long-term prices.
The Klinger Volume Oscillator is made up of two lines, generally blue and red, that fluctuate above and below the zero line.
- The Klinger Volume Line (red line). This line is formed by the difference between two exponential moving averages (EMA) of volume force. The indicator particularly measures the EMA (34) of volume force and deducts the EMA (55) of volume force to get the line. The volume force is an indicator that depends on volume, price, and price direction. This formula smooths the volume data and highlights the link between volume and price movement.
- The Signal Line (blue line) is the 13-period exponential moving average of the Klinger Oscillator line. It serves as a trigger line, assisting traders in determining possible entry and exit spots.
The price chart below shows the Klinger Oscillator in action.
As shown in the illustration above, the Klinger Volume Oscillator is a sub-chart consisting of two lines with values ranging between -600 and +600. It forms a buy or sell signal when the crossover of the indicator lines occurs.
Calculation of The Klinger Oscillator
The calculations and formula for the Klinger Volume Oscillator are fairly complex, and traders are not required to understand them. They must instead thoroughly understand how to read the indicator. However, we will go over the fundamentals of the computations as well as the formula for the Klinger Volume Oscillator.
There are several components required in its calculation.
- Volume Force (VF)
- 34-period EMA (Exponential Moving Average) of VF
- 55-period EMA of VF
All these calculations are then put in the following formula of the Klinger Volume Indicator.
KO = 34-period EMA of VF – 55-period EMA of VF
Step 1: Calculate the Volume Force
Volume Force (VF) = volume x { 2 x [ (dm/cm) – 1 ] } x trend x 100
Where:
Trend = +1 if typical price > previous typical price else -1, the bar’s typical price is average of bar high, low, and close.
dm = high – low
cm = previous cm + dm if Trend = previous Trend else previous dm + dm
Step 2: Calculate EMA’s of volume force (VF)
Step 3: Determine the Klinger Volume Oscillator Indicator
This is calculated by subtracting the long-term EMA of VF from the short-term EMA of VF.
Klinger Oscillator (KO) = short-term EMA of VF – long-term EMA of VF
Technically, the indicator line escalates when the value of the shorter-period 34 EMA crosses the value of the longer-period 55 EMA. However, the line drops when the opposite occurs.
Klinger Volume Oscillator vs. Other Volume-Based Indicators
Other volume-based indicators, including the Chaikin Money Flow (CMF) and Balance Volume (OBV), are similar to the Klinger Oscillator.
Comparison with Chaikin Money Flow
While both the KO and the CMF are concerned with money flow, their calculations and interpretations differ. The CMF measures money flow by linking volume and price to the price range between high and low prices, whereas the KO takes into account volume force and price trends. The CMF is more concerned with determining buying and selling pressure, whilst the KO is concerned with capturing the long-term pattern of money flow.
Comparison with On Balance Volume
The OBV, similar to the KO, is a volume-based cumulative indicator. However, the OBV just evaluates the correlation between volume and closing price, but the KO considers additional factors, including volume force and price trends. Therefore, the KO may provide a more sophisticated understanding of money movement than the OBV.
How to use Klinger Oscillator in Trading
Understanding the interpretation of the Klinger indicator is critical before adding it to your trading plan. The main approach to effectively employ the Klinger Oscillator in your trading decisions is observing crossovers between the indicator’s lines. Other strategies, such as zero-line crossovers and divergence, can also be useful.
Below, we shall discuss various ways of using the Klinger Oscillator strategy in trading.
Trading Crossovers
Crossovers are the most basic way of spotting buy and sell signals with the Klinger Oscillator. The signal line is often a 13-period moving average of the Klinger oscillator that helps to smooth the Klinger and offers buy and sell chances. When the oscillator passes over the signal line, it is a bullish crossover, indicating that the trend is turning from bearish to bullish. This signal can be used by traders to enter a long position.
Similarly, when the KO crosses below the signal line, the momentum shifts from bullish to bearish. This opens the door for traders to go short.
Trading Divergences
Another common Klinger Oscillator strategy is to watch out for divergences between the Klinger Oscillator and the price. A bullish divergence happens when the price forms a lower low, but KO makes a higher low. This signifies a strong buying pressure despite a lower price.
On the other hand, a bearish divergence happens when the price creates a higher high, but the Klinger Oscillator makes a lower high. This may indicate significant selling pressure despite the higher price. These divergences could be used by traders to enter trades in the appropriate direction.
Zero-line Crossovers
Like many other sub-chart indicators, the zero line on the KVO chart is also noteworthy. When the KO crosses over the zero line, it suggests a positive money flow and a possible purchasing opportunity. On the contrary, when the KO passes below the zero line, it indicates negative money flow and a potential selling opportunity.
How to Verify Signals
It’s vital to highlight that traders don’t depend only on the Klinger Volume Oscillator. It’s generally better to corroborate the signals with different technical analysis tools.
For instance, if the KO crosses over the signal line and the asset’s price is also over its 200-day moving average (blue), this might be a buy indication. A potential sell signal appears if it drops beneath the slower line and the price of the asset declines below its 200-day moving average.
The KVO 0 line is a characteristic of the indicator that has yet to be mentioned. Although less essential than crossovers or divergences, the 0 line can be employed to verify trend direction. A rise above or below 0 does not always indicate a bullish or bearish trend, but a bullish or bearish trend may be verified when the KO closes above 0.
You may, for example, search for a bearish crossover (KO crosses below 0), then verify the entry when KO drops below 0, and vice versa. This could help limit the number of misleading signals it produces.
Advantages & Limitations of the Klinger Oscillator
While the Klinger Volume Oscillator is a handy and versatile tool for identifying a trend and incoming trend reversal, it also has limitations. Here are some of its advantages and drawbacks.
Advantages
- It can indicate potential price reversals before they happen.
- It combines price and volume analysis, offering a comprehensive picture of money flow.
- It is versatile and captures both long and short-term trends.
Limitations
- It may produce false signals during low liquidity or high volatility periods.
- It may be affected by sudden drops or spikes in volume, which could distort the indicator and the signal line.
- It is not a stand-alone indicator and requires use in conjunction with other technical analysis tools.
Conclusion
The Klinger Oscillator is a useful tool for investors and traders who want to analyze the flow of money into and out of equities. The Klinger Oscillator shows a distinctive perspective of the financial markets by integrating volume and price movements. While it has limitations, it can be a valuable addition to a trader’s toolset when combined with other technical indicators, such as moving averages and trendlines, as well as sound risk management concepts.
