Forex trading can be viewed as a science and the more tools a trader has at their disposal the more flexible they will be to take advantage of different market conditions. Technical and fundamental analysis play a big role in the tools which traders utilize to gain an upper hand on the market. Presently, there are numerous technical tools which a trader may leverage to increase their odds of being successful. Traders use volume as a pricing indicator which services as a strong tool in gauging relative strength. The volume oscillator has been utilized by traders for decades and depicts the relative strength of shorter volume moving average to that of a longer one. To simplify matters and understanding of the volume oscillator we can state that whenever the trader receives a positive reading for the volume oscillator it may mean that there is strength on the short term side in the direction of the primary trend. Conversely, if the volume oscillator is in negative territory this means that volume is lacking and the change is trend is probable.
There is no magic when utilizing volume as a tool to help determine price action. When using the volume oscillator, the trader should look to determine when volume is slowing down and drying up and when volume is accelerating. When looking at a volume chart the forex trader can see where price closed from the previous trading session. The question which the forex trader should be asking is what is the future/foreseeable direction of the trend? When looking closely at volumes highs and lows we could be receiving several different messages from the signals being received. The goal of the trader is to interpret these signals though the use of the volume oscillator to determine where the market is heading.
There are numerous scenarios which are associated to volume oscillators. The trader should be aware of the different situations in which they may encounter these situations. When utilizing volume oscillators, the trader will experience breakouts in the markets. Breakout confirmations can be difficult to catch. In addition, breakouts usually have a high failure rate because these instances are visible to all traders. The chart below is a good example of a volume oscillator spiking higher while Apple (AAPL) approaches the previous low (not only can oscillators be used for forex but they can be utilized with securities).
The low had a volume oscillator spike in the range of twenty-three and four tenths while the break had a reading of thirty one and seven tenths. What this means is that there is no true evidence that the price action will continue lower. The forex trader should interpret this that the amount of pressure associated to the sell side increased on the retest of the low. During this period either one of two things may take place; Apple (AAPL) would either reverse sharply and a selling spike could lead to a reversal or Apple (AAPL) will shoot lower by a push from the bears in control of the security.
Within the forex industry there is a term called riding the trend. When volume is in a strong uptrend or downtrend price action can be quite deceiving. It is typical that during a trend volume will appear to float in the same direction of the initial trend. The floating of price action can be very challenging and difficult to interpret. The lack of direction when it appears that the marketing is floating may for all intents and purposes lead to trigger a reversal.
The trader needs to be aware of utilizing volume oscillators in choppy markets. The volume oscillator can provide a boat load of false signals when markets trade in tight ranges. When this happens it will appear that price along with volume action will look almost nonexistent. The chart below is a good example of false signals in a choppy market;
As you can see it appears that there is more going on in the chart than there actually is. The bottom line is that we don’t have a clear and concise notion of the direction in which the stock will break and only time will tell who is in control of the market, either bulls or bears.
The drawing of trend lines is very important when working with volume oscillators/indicators. The purpose of drawing lines is to identify breakout patterns associated to the indicators to determine that the price action will likely start to trend. The volume oscillator sometimes breaks out prior to the trend taking place and other times it will not. This can be chalked up to the law of averages.
It should be noted that there are several types of volume oscillators. There is the Market Volume Oscillator (MVO) and the Percentage Volume Oscillator (PVO). Both the Market Volume Oscillator and Percentage Volume Oscillator are determined by the Volume Oscillator.
In closing, the volume oscillator is a very useful technical analysis tool for forex traders. Traders may optimize the volume oscillator to gauge relative strength. It should be understood that whenever the trader captures a positive reading for a volume oscillator there is a strong chance that there is strength on the short term side in the direction of the primary trend. In addition, if the volume oscillator is negative then this means that the volume is almost non-existent and that there is a strong likelihood that a change in trend is likely. Also, the volume oscillator will help the trader to better determine when volume is slowing/faltering and when volume is speeding up. Through the use of the volume oscillator the trader will be able to better answer the question of what is the future direction of the trend. The volume oscillator will also help the forex trader better grasp breakouts in the markets. Breakout confirmations can be very difficult to determine and by leveraging volume oscillators the forex trader may be more attune to when the breakouts may occur.
Source:: How to Use Volume Oscillators