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 interpreted using the same principles as volume analysis:
- An increase or decrease in price accompanied by an increase in volume is 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 is confirming price direction, whether it be up or down.
- An increase or decrease in price accompanied by a decrease in volume is 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 is 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:
The fact that price is making higher highs and higher lows is 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 double bullish sign is given.
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.
