Almost any trader will tell you that volume is an important ingredient when it comes to successful trading. Without accurate knowledge of volume, traders can find themselves on the wrong side of a trade – and that’s something nobody wants! In this blog post, we take a look at the volume oscillator indicator (VOSC) and explore how traders can use it to help them make informed trading decisions. So, what is VOSC and how can it help your trading? Keep reading to find out!
What is Volume Oscillator
So what is the volume oscillator? Simply put, it’s an indicator that measures the difference between two moving averages of volume. By doing this, it can help you identify periods of high and low volume, which can be helpful in making trading decisions.
There are a few different ways to interpret the volume oscillator, but one of the most common is to look for divergences. A divergence occurs when the price is moving in one direction and the volume oscillator is moving in another. This can be an indication that the current price move is not backed by enough volume and could be ready to reverse.
There are two main components to the VOSC indicator the fast moving average (MA) and the slow moving average (MA). The fast MA is typically set to a period of 14, while the slow MA is set to a period of 28.
When the fast MA crosses above the slow MA, it indicates that volume is increasing and prices may start to rise. Conversely, when the fast MA crosses below the slow MA, it indicates that volume is decreasing and prices may start to fall. The Volume Oscillator formula can be a helpful tool for traders who are trying to time their entries and exits in the market.
The Volume Oscillator Formula
The VOSC formula is:
VOSC = Fast MA of Volume – Slow MA of Volume
Usually it used 14 and 28 periods for moving averages.
Calculating Volume Oscillator
The Volume Oscillator calculation steps are as follows:
First, take the 12-period moving average of volume. Second, take the 26-period moving average of volume. Subtract the 26-period moving average of volume from the 12-period moving average of volume. Third, take the 9-period exponential moving average of the result.
The formula for this calculation is as follows:
((12MA of V) – (26MA of V)) EMA(9).
How to Use Volume Oscillator in Trading Strategies
The Volume Oscillator is useful in spotting directional changes in a security’s price. A buy signal is generated when the Volume Oscillator crosses above the signal line and a sell signal is generated when it crosses below the signal line.
Some traders also use crossovers of the zero line to generate buy and sell signals. crossovers of the zero line tend to be more frequent than crossovers of the signal line and, as a result, may generate more false signals.
When interpreting the results of this calculation it is important to consider other indicators in conjunction with it in order to confirm trading signals. As with all technical indicators, it is important to remember that price action precedes indicator action and that indicator action should never be used as a sole guide for making trading decisions.
Limitations of VOSC
The volume oscillator is a popular technical indicator that is used to measure the flow of trading volume. However, the indicator has several limitations that traders should be aware of. First, the volume oscillator only takes into account the number of shares traded, and not the value of those shares. This means that the indicator does not provide any information about the underlying strength of the market. Second, the volume oscillator is a lagging indicator, which means that it can only provide information about past trading activity, and not future activity. Finally, the volume oscillator is only one part of a larger picture, and should not be used in isolation when making trading decisions. While the indicator can be a useful tool, traders should be aware of its limitations before using it in their own trading strategies.
Conclusion
The VOSC is a great tool for technical traders because it can help you make better predictions about future price movements. The key to using this indicator successfully is to understand how it works and what its limitations are. Once you have a good understanding of the volume oscillator, you can start incorporating it into your trading strategies.
If you want to learn more about how to use the VOSC in your trading, subscribe to our free VOSC based trading strategies.
