Volume Oscillator: The professional guide!

Volume indicators

Volume Oscillator
  • The Volume Oscillator identifies the trend in volumes with a system of two Exponential Moving Averages..
  • The Volume Oscillator is made up of two moving averages of volume, one fast and the other slow.
  • The moving average of the fast volume is subtracted from the moving average of the slow volume.

When there’s a low trade volume but high gains and losses, professionals try to achieve a turn in the market direction. Usually, without strong volume, a market movement is not valid. It is an indicator that traders monitor to determine a conviction in market movement. Let’s deep dive into the Volume Oscillator.

Volume may be the simplest of all indicators to understand – just include the number of shares traded in a particular time to determine the answer. Such simple calculations don’t need weightings or exotic mathematical formulas. It just shows enthusiasm or lack thereof for a problem and it has nothing to do with the price.

A technical analyst has to determine if the measurements of price and volume momentum agree with each other or not. This is to confirm a turnaround or trend reversal in the market. 

Disagreement shows weakness in the trend, therefore, a trend reversal may well be on the horizon. Looking at volume from the standpoint of momentum shows an obvious level of buying and selling activity.

What is the Volume Oscillator?

The volume oscillator is made up of two moving averages of volume, one fast and the other slow. The moving average of the fast volume is subtracted from the moving average of the slow volume. The volume oscillator is mostly understood using the same principles as volume analysis.

An increase or decrease in price followed by an increase in volume could be seen as an indication of strength in the current trend. Thus, when the fast volume moving average is greater than the slow volume moving average, the volume oscillator is above the zero lines and might be indicating price direction, whether up or down. 

An increase or decrease in price followed by a decrease in volume could be seen as an indication of weakness in the current trend. Thus, when the fast volume moving average is lower than the slow volume moving average, the volume oscillator is below the zero lines and could be warning that the price direction is lacking conviction.

How is the Volume Oscillator built?

The volume oscillator works on the principle that it is not the real level of volume, but the change in volume about the recent past that has more technical significance. 

The oscillator shows the variation between two moving averages of the volume of security shown as a percentage. It measures volume by measuring the link between two moving averages.

The indicator calculates a slow and fast volume moving average. The difference between the two charts as a histogram. 

The fast volume moving average is mostly over a time of 14 days or weeks. The slow volume moving average mostly takes at least 28 days. Professionals usually argue about the applicability of these periods – some say that 14 and 28 are too conservative, while others say that these numbers are not conservative enough.


The volume oscillator should increase in a rallying market. When a commodity becomes overbought, the volume oscillator will change its direction. When the market goes down or moves in a horizontal direction, it should contract.

Remember that changes in volume are measured, and volume expands during a sell-off. It is necessary to note that a rising price, with declining volume, is always bearish. When the market is at the top, you can see an oversold volume chart. The rising volume and declining prices is also a bearish indication.

How the Volume Oscillator works

Traders can make use of the difference between two moving averages of volume to know if the overall volume trend is decreasing or increasing. When the oscillator goes higher than zero, it indicates that the shorter-term volume moving average has risen higher than the longer-term volume moving average. Therefore, the short-term volume trend is higher than the longer-term volume trend.

Traders can use the volume indicator to confirm a resistance or support level. A support level on increasing volume shows a stronger move than a support break on low volume. Also, a resistance break on expanding volume indicates more buying intensity.

How to gauge Volume while trading?

Volume is like the air we breathe. Without it, traders cannot make a sound trading decision. It is what makes price move and trend. If you’re a trend trader, swing trader, day trader, or a breakout trader, you need volume activity to observe price movement.

  • Without volume, it is impossible to make a profit
  • Volume is what moves the price 
  • When there is no volume, traders end up taking a loss

With a good volume indicator to determine volume, traders can get rid of some of the inevitable losses. In the long-term, this can be very important to the bottom line. The less lose you take, the more profits you’ll keep in your forex trading account.

How to measure volume in Forex

The market measures volume by counting tick movements. The logic behind this is that price moves up and down in ticks. The forex market cannot measure how many contracts are sold, but it can determine how many tick prices move up or down.

Therefore, no matter how many transactions a trader has completed making the price move, the net effect will be measured. The volume focuses on the net effect, then analyzing the process.

Importance of the Volume Oscillator

Few traders know how to use volume to increase their profits and reduce their losses. A lot of traders don’t know why volume analysis is a powerful tool. We can even distinguish several volume indicators available on most trading platforms. But, strangely, a lot of traders are not aware of the principles of using volume oscillators to maximize their profits.

In most cases, the volume of information is useful because of its capability to draw attention to unusual selling or buying activities. The price mostly moves from times of low to high volume activity, and, vice versa.

If you can detect these activities of intense selling or buying, you can trade together with the big players.

High selling and buying volume can create trends and be the driving tools for the change in the trend direction. Volume analysis can assist traders to see these trends before they are visible on the price chart.

The Importance of Buying Volume and Selling Volume

Volume trading demands traders to pay close attention to the laws of supply in demand. Traders have to look for opportunities for increased selling or buying orders. They also pay attention to recent price trends and potential price movements.

Generally, more trading volume will heavily lean towards buy orders. These positive volume trends will cause traders to open new positions.

On the other hand, if there’s a decrease in the cash flow and trading volumes, that will lead to a “bearish divergence”. This means that it will likely be the right time to sell.

You also need to pay close attention to the relative volume – regardless of the number of transactions happening in trading time. Ask yourself how the prospective asset is performing, relative to what was expected.

In conclusion

This is only one of the many methods to determine market direction so as you can further enhance your investments. When it comes down to it, no system is 100 percent dependable. 

Therefore, regardless of your confidence, remember that it is your money, invest it wisely. The volume oscillator indicator could be a useful tool for any technical trader. Analyzing volume gives traders another perspective for analyzing potential trades.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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