Volume Oscillator – What It Is & How to Trade with It

Volume Oscillator – What It Is & How to Trade with It

What is the Volume Oscillator?

The Volume Oscillator (VO) is a technical indicator that measures the difference between short-term and long-term volume moving averages, helping traders understand whether trading volume is increasing or decreasing relative to past activity. This makes it useful for detecting trend strength, breakouts, and potential reversals.

The Volume Oscillator formula is:
VO = [(Short-Term Volume MA – Long-Term Volume MA) / Long-Term Volume MA] × 100

Where:

• Short-Term Volume MA = A moving average of volume over a shorter period (e.g., 5).
• Long-Term Volume MA = A moving average of volume over a longer period (e.g., 20).

Key Features of Volume Oscillator

• Measures volume trends to confirm price momentum.
• Positive values indicate increasing volume (stronger trend).
• Negative values indicate decreasing volume (weaker trend).

How to Use Volume Oscillator in Forex Trading

1. Trend Confirmation Strategy

VO helps traders confirm trend strength based on volume:

• Bullish Trend: VO is above zero, confirming strong buying pressure.
• Bearish Trend: VO is below zero, confirming strong selling pressure.

2. Volume Divergence Strategy

Divergence between VO and price action can signal potential trend reversals:

• Bullish Divergence: Price forms a lower low, but VO forms a higher low (buy signal).
• Bearish Divergence: Price forms a higher high, but VO forms a lower high (sell signal).

3. Breakout Confirmation Strategy

The Volume Oscillator can confirm breakouts by showing volume surges:

• Buy when: Price breaks above resistance, and VO is rising.
• Sell when: Price breaks below support, and VO is falling.

4. Volume Oscillator with Moving Averages

Pairing VO with a moving average (e.g., 50 EMA) helps refine trade entries:

• Buy when: VO is rising, and price is above the 50 EMA.
• Sell when: VO is falling, and price is below the 50 EMA.

Pros and Cons of Using Volume Oscillator

✅ Pros:

• Helps traders confirm trend strength using volume.
• Useful for identifying strong breakouts.
• Works well with trend-following and divergence strategies.

❌ Cons:

• Requires volume data, which may not always be available in forex.
• Can produce false signals in low-volume markets.

Final Thoughts

The Volume Oscillator is a powerful volume-based indicator that helps traders confirm trends, detect reversals, and validate breakout trades. When combined with moving averages or price action strategies, VO enhances trade accuracy and decision-making.