Stocks & Commodities V.

28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT

The Energy Behind The Move

This oscillator can expose the amount of energy behind a price move.

by Martha Stokes, CMT

ost traders know the popular price oscillators: stochastic, the relative strength index (Rsi), Williams %R,
price rate of change, and so forth. Price oscillators are
second only to the moving average convergence/divergence (Macd) in popularity and use by retail traders.
But few traders know about or use volume oscillators, a
far more important category. While price oscillators are used
mostly to reveal overbought and oversold price conditions
with a high and low percentage range, volume oscillators
can help identify the energy behind the move.

Volume oscillators

Volume oscillators can expose market energy of all kinds as

well as reveal the shift of energy from up to down and vice

versa. Being able to identify an increase in volume (which

indicates increasing energy for the stock) or a shift in direction can help the short-term trader determine the duration and
sustainability of the current price action. This can help screen
out weaker stock picks and ascertain when to exit a trade.
In todays institutional activitybased market, the volume
oscillator can reveal buying and selling patterns before price
begins a major move. This is because many of the large institutions are careful not to disturb price as they buy incrementally.
On the daily chart of Kirklands, Inc. (Kirk), as price
moves up during the OctoberDecember period, the volume
oscillator pattern forms lower highs, indicating a weakening
of upside energy (Figure 1). However, a spike exhaustion
pattern during the correction in January forewarns of an exhaustion pattern to the downtrend as high-frequency traders sell short for one day and then move on. The February
volume oscillator cycle fails to bottom and the upside price
action resumes. By studying these patterns carefully, the re-

Copyright (c) Technical Analysis Inc.

JESSICA MARZURKIEWICZ

Volume, The Forgotten Oscillator

Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT

tail trader can anticipate and prepare

for reversals and retracements prior to
price actually changing.

How the formula works

The standard volume oscillator available for most charting software is a center line oscillator. Instead of oscillating
between a high range and a low range
the way most price oscillators do, center line volume oscillators move above
and below a zero line. The center line
exposes the volume energy behind the
price action for both buy and sell sides.
By watching the volume oscillator as
well as a pure price oscillator such as
stochastic, traders take their analyses
to a more analytical level to anticipate
price changes before price reverses on
the short-term trend. Being able to anticipate price action well ahead of the
event is a decided advantage when the
market is moving with velocity.
The example you see in Figure 2 of
the volume oscillator formula turns at
the zero line. The formula calculates
the percentage of deviation from an
exponential moving average (Ema) to
identify significant changes to volume
for this particular stock. The Ema can
be adjusted in the formula to adapt to
trading styles and the current market
condition. In this example, the shortterm Ema is set at 12 periods and the
long term is set at a 28-period Ema
with a time series method.
The volume oscillator is an advanced analysis tool that aids in identifying underlying changes to shortterm sentiment. Volume oscillators are
ideal for professional high-frequency
traders, daytraders, swing traders, and
velocity traders. Position traders may
also find this indicator useful during
platform market conditions.

Extreme patterns

KIRKLANDS ORD

22.0
21.0
20.11
20.0
19.0
18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
Volume Oscillator

200
150
100
50
0
-50
-100
-150

14 21 28 5

12 19 26 2

October

16 23 30 7

November

14 21 28 4

December

11 19 25 1

2010

16 22 1

February

March

15 22

Figure 1: ANTICIPATING REVERSALS AND RETRACEMENTS. From October to December, the volume
oscillator pattern forms lower highs, indicating a weakening of upside energy. A spike exhaustion pattern during
the correction in January forewarns of an exhaustion pattern to the downside trend. The February volume oscillator
cycle fails to trough and the upside price action resumes.
Stochastic Oscillator

50
Volume Oscillator

50
0
-50

Figure 2: how the volume oscillator works. The volume oscillator calculates the percentage of
deviation from an EMA to identify significant changes to volume from the norm.
CATERPILLAR ORD

65
64
63
62
61
60
58.90
59
58
57
56
55
54
53
52
51
50
49
48
47
Volume Oscillator

100
50
0
-50

14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 19 25 1 8 16 22 1 8
As with all indicators, the volume osOctober
November December
2010
February
March
cillator can indicate extreme patterns to
FIGURE
3:
EXTREME
PATTERNS.
The
volume
oscillator
exposed
the
weakening
volume
action
prior
to
a top
both the upside and downside action.
forming. Here, the exhaustion pattern on the volume oscillator occurs often just before a topping action as the last
Extremes warn of a change in direction surge of late buyers rush in on speculation and as high-frequency traders trade the stock intraday in January.
for the short-term price action. Extreme
ranges occur when the oscillator exceeds its normal range. The cillator exposed the weakening volume action prior to the
oscillator will move sharply to the top or bottom of the chart, forming of a top. The exhaustion pattern on the volume osoften forming a near-vertical angle of ascent or descent.
cillator occurs just before a topping action as the last surge
Figure 3 of Caterpillar (Cat) shows how the volume os- of late buyers rush in on speculation and as high-frequency

Copyright (c) Technical Analysis Inc.

TECHNITRADER.COM

INDICATORS

Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT
INDICATORS

INTERNATIONAL BUSINESS MACHINES ORD

135
134
133
132
131
130
129
128
127.60
127
126
125
124
123
122
121
120
119
118
117
116
115
114
Volume bars, Volume

150000
10000
5000
0
x1000 24 31 8

14 21 28

September

12 19 26 2

October

16 23 30 7

November

14 21 28 4

December

11 19 25 1

2010

16

February

Volume Oscillator

50
-

-50

10 17 24 31 8 14 21 28 5

August

September

12 19 26 2

October

16 23 30 7

November

14 21 28 4

December

11 19 25 1

2010

16

February

FIGURE 4: APPLYING THE VOLUME OSCILLATOR. The volume oscillator exposes cyclical patterns in volume
and extreme readings in volume that may not be as evident in volume bars alone.

INTERNATIONAL BUSINESS MACHINES ORD

125
120
115
110
105
100
95
90
85
Stochastic Oscillator

50
Volume Oscillator

50
0
-50
9

17 23 2

February

March

16 23 30 6 13 20 27 4

April

11 18 26 1

May

June

15 22 29 6

July

13 20 27 3

10 17

August

FIGURE 5: CONTRADICTING PRICE OSCILLATORS. The stock is building a platform, a common sideways
pattern that develops as institutional investors quietly move into a stock without moving the price out of a tight
range. Stochastic is dropping below its overbought 80% line while the volume oscillator is heading steadily upward
as the platform develops. This creates a convergence pattern between stochastic and the volume oscillator. This
pattern is a leading indication that the platform will break to the upside.

traders trade the stock intraday in January. The spiking pattern moves well beyond
the normal range. The subsequent peak fails and forms a significantly lower high
in February and March.

How and when to use it

There are numerous ways you can use a volume oscillator to speed up your trade
analysis. Volume oscillators aid in the analysis of volume bars as seen in the
chart of Ibm in Figure 4. The volume oscillator exposes cyclical patterns as well
Copyright (c) Technical Analysis Inc.

as extreme readings that may not be as

evident in volume bars alone.
The volume oscillator is easy to read
with its center line. As the volume indicator moves up above the center line,
it indicates accumulation or rising interest in the stock to the buy side. As
long as the indicator remains above
and/or oscillating near the center line,
buyers will dominate stock activity and
the bias will remain to the upside on
the short-term trend. When the volume
oscillator heads down and moves well
below the center line, a distribution or
selling pattern is occurring. For shortterm trading, this can be profit-taking
after a big move up.

Contradicting price

oscillators
One of the most important advantages
when using a volume oscillator in conjunction with a price oscillator such
as stochastic or the Rsi is when a contradiction occurs between the volume
oscillator and the price oscillator. Such
contradictions are known as divergences or convergences between indicators.
In Figure 5, you can see an example
of a contradiction between the stochastic and volume oscillator. The stock is
building a platform, a common sideways pattern that develops as institutional investors move into a stock
without moving price out of a tight
range. Institutional investors are the
most dominant of the eight market participant groups and their activity often
goes unnoticed because they use controlled bracketed orders that maintain
price at certain levels.
Stochastic is dropping below its
overbought 80% line while the volume
oscillator is heading upward as the
platform develops. This creates a convergence pattern between the stochastic
and the volume oscillator. This pattern
is a leading indication that the platform
will break to the upside, which can be
a critical piece of information for position and swing traders, trading platforms, and earning strategies.
Platforms are common sideways
patterns that form after bear markets
and intermediate-term corrections and
during value-oriented market condi-

Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT

tions. These slower-moving uptrends

build lengthy tight sideways action that
tends to follow earnings reports during
slower economic and business cycles.
Ibm formed a lengthy platform during August and September in Figure 6.
Stochastic floated from late July to early August and then slipped downward
during the platform stage. However, the
volume oscillator continues to rise during this period, followed by an upside
breakout move in October.
The value-oriented market creates
a slower platform-building pattern for
most stocks. Being able to see the activity of the institutional investor moving in before price moves helps traders
enter these platforms prior to breakout
moves, gaps, and runs.

Floating stochastic

and volume oscillator

During moderately trending markets,
when most price oscillators fail to oscillate but form a floating pattern at their
overbought line, a volume oscillator can
be an invaluable analysis tool for swing
and velocity traders, exposing weakening price action before a retracement.
The chart of Tam (Tam) in Figure 7
shows a spike on the volume oscillator
during a platform and prior to the move
up. This is often indicative of heavy institutional investor activity that tends
to use controlled bracketed orders that
do not move price during the accumulation phase. As the stock moves up,
the volume oscillator hovers around its
center line, indicating steady consistent
volume activity until December when
the volume oscillator suddenly forms a
divergence with price, just prior to the
topping action.

Volume oscillator

and gaps
Platforms and bottoms often have huge
gapups due to institutional short-term
and high-frequency traders who trade
speculatively when they discover that
their counterpart, the institutional investor, has been accumulating. Their largelot speculative buying patterns drive
price up in sudden, explosive moves.
The volume oscillator can be a useful
tool in finding stocks poised for a huge

INTERNATIONAL BUSINESS MACHINES ORD

130
127.60
125
120
115
110
105
100
Stochastic Oscillator

50
Volume Oscillator

50
0
-50
29

13

20

July

27

10

17

24

31

August

14

21

28

September

12

October

FIGURE 6: PLATFORM FORMATIONS. IBM formed a lengthy platform pattern during August and September.
Stochastic floated from late July to early August and then began to slip downward during the platform stage.
However, the volume oscillator continued to rise during this period followed by an upside breakout move in
October. Being able to see the activity of the institutional investor moving in before price moves helps traders
enter these platforms prior to breakout moves, gaps, and runs.

TAM ADR RPSTNG 1 PRF

26
25
24
23
22
21
20
19
18
17.55
17
16
15
14
13
12
11
10
9
Volume Oscillator

250
200
150
100
50
0
-50
-100
29 6

July

13 20 27 3

10 17 24 31 8 14 21 28 5

August

September

12 19 26 2

October

16 23 30 7

November

14 21 28 4

December

11 19 25 1

2010

February

FIGURE 7: FLOATING STOCHASTIC AND VOLUME OSCILLATOR. Here you see a spike on the volume
oscillator during a platform and prior to the move up. This is often indicative of heavy institutional investor
activity. As the stock moves up, the volume oscillator hovers around its center line, indicating steady consistent
volume activity until December, when the volume oscillator suddenly forms a divergence with price just prior to
the topping action.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT
INDICATORS

gap or runaway price action. In Figure 8,

in the chart of Gymboree Corp. (Gymb),
you see a floating stochastic as the volume oscillator turns upward and moves
above its center line. Although price is
sideways, volume is building energy during this bottoming phase.
Figure 9 shows the gap that formed
on Gymb shortly thereafter. The volume
oscillator indicated heavy buying activity
in Gymb prior to the huge gap. Stochastic was in a momentum floating pattern
that did not signal to enter the stock at
that time. By using the volume oscillator
with stochastic or any other price oscillator, the swing and velocity trader is able
to enter the stock prior to the gap price
action, thereby increasing their profits
significantly.

GYMBOREE ORD

53
52
51.38
51
50
49
48
47
46
45
44
43
42
41
40
39
38
Stochastic Oscillator

90
80
70
60
50
40
30
20
10
Volume Oscillator

200
150
100
50
0
-50
-100

Buying exhaustion patterns

21

28

12

19

26

October

16

23 30

November

14

21 28 4

December

11

19

25

2010

16

22

February

FIGURE 8: STOCHASTIC AND VOLUME OSCILLATOR. Here you see a floating stochastic as the volume
oscillator turns upward and moves above its center line. Although price is in a sideways pattern, volume is
building energy during this bottoming phase.

GYMBOREE ORD

53
52
51.38
51
50
49
48
47
46
45
44
43
42
41
40
39
38

During velocity (that is, momentum)

trades, the volume oscillator can forewarn of a buying exhaustion pattern even
while stochastic floats, signaling early
that the run is losing energy as price advances upward. In Figure 10 you can see
that a negative divergence between price
and volume has occurred, indicating early that price action is losing energy.

Subindicators with

Stochastic Oscillator

90
80
70
60
50
40
30
20
10
Volume Oscillator

200
150
100
50
0
-50
-100
5

12

October

19

26

November

16

23

30

14

December

21

28 4

2010

11

19

25

February

16

22

March

FIGURE 9: VOLUME OSCILLATOR AND GAPS. The volume oscillator indicated heavy buying activity in GYMB
prior to the huge gap. Stochastic was in a momentum floating pattern that did not signal to enter the stock at
that time. By using the volume oscillator with stochastic or any other price oscillator, you are able to enter the
stock prior to the gap price action.

Copyright (c) Technical Analysis Inc.

volume oscillator
A variety of subindicators can be applied
to the volume oscillator to facilitate in
faster analysis and more subtle nuances
of the indicator cyclical patterns. For
short-term trading (such as intraday, daytrading, swing, or velocity), the use of an
Ema, rate of change, or linear regression
lines applied to the volume oscillator to
create another indicator line can be useful to further sharpen the analysis process. Convergence and divergence patterns between the volume oscillator and
the subindicators can help a trader enter
or exit the stock more quickly before a
sudden price move.
The chart of Google (Goog) as shown
in Figure 11 reveals an Ema applied to
the volume oscillator. The 25-day Ema
exposes the weakening pattern for the
volume oscillator even before the volume oscillator moves below its center
line. This gives a short-term trader extra
time to plan the best exit strategy.

Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT
GOOGLE CL A ORD

600
581.140

Summary

The volume oscillator can be an additional

analysis tool to use with price oscillators
to help expose strengthening or weakening volume patterns that often precede
changes to price action and direction.
As with all indicators, the volume oscillator requires study and practice to use
it properly and learn its nuances. Extreme
oscillation patterns can reveal shifts of
sentiment and bias from buyers to sellers
and from short sellers to buyers. The indicator is ideal for short-term trading styles
and can show buying patterns of the institutional investor during platform markets
when price appears to be listless. Institutional investors control price through the
use of bracketed orders that contain their
buy entries within a tight price range.
However, the volume oscillator can expose the surge of buying even while price
remains in a narrow price range. This allows the retail trader to buy in before the
sudden breakaway gaps or large runs out
of the platform.
The volume oscillator is an advanced
indicator and should be used by traders
who have plenty of trading experience
and a strong knowledge base of price
oscillators and other indicators. Beginning traders, however, will need to first
learn price oscillators and various volume indicators before attempting to use
the volume oscillator. Adding a volume
oscillator to your indicator toolkit can increase your profit potential and help you
anticipate a change to price action before
it commences.

550

500

450

Stochastic Oscillator

50
Volume Oscillator

50
0
-50
27

10

17

24

August

31

14

21

28

September

12

19

26

October

16

November

23 30

14

21 28

December

FIGURE 10: BUYING EXHAUSTIONS. Here you see that a negative divergence between price and volume
has occurred, indicating early that price action is losing energy.

GOOGLE CL A ORD

600
581.140
550

500

450

Stochastic Oscillator

50
Volume Oscillator

50
0
-50
27

10

August

17

24

31

14

21

September

28

12

October

19

26

16

November

23 30

14

21 28

December

FIGURE 11: SUBINDICATORS WITH VOLUME OSCILLATORS. Here you see an EMA applied to the volume
oscillator. The 25-day EMA exposes the weakening pattern for the volume oscillator even before the volume
oscillator moves below its center line. This gives a short-term trader extra time to plan the best exit strategy.

Martha Stokes is a Chartered Market

Technician and a member of the Market
Technicians Association (Mta). The author of Cycle Evolution Theory and a popular lecturer, Stokes is a master-rated
technical analyst for Decisions Unlimited and codeveloper
of the TechniTrader stock market trading courses, workshops, and virtual classes. In addition, she writes several
educational newsletters for active traders. To learn more,
visit www.technitrader.com or www.marthastokes.com or
call TechniTrader at 888-846-5577.

_____ [2007]. The Missing Cycle, Technical Analysis of

Stocks & Commodities, Volume 25: April.
_____ [2007]. Whats Your Trading Style? Technical
Analysis of Stocks & Commodities, Volume 25: Bonus
Issue (no. 4).
_____ [2006]. Tools Of The Trade, Technical Analysis of
Stocks & Commodities, Volume 24: November.

Suggested reading

Stokes, Martha [2007]. The Angle Of Ascent, Technical

Analysis of Stocks & Commodities, Volume 25: September.
S&C

Copyright (c) Technical Analysis Inc.