Price and volume have a strong relationship in crypto trading. Professional crypto traders understand that any price movement not justified by volume may be an unreal movement. For example, if the price of a crypto keeps going up, but its trading volume is low, it may not be a real uptrend. So, whenever a trader sees a trend, if they are a professional, they always check if the price momentum and volume momentum agree with each other. You have already learned about several indicators that focus on price. Therefore, there is no need to introduce another. It is time to learn about a powerful indicator that focuses on volume, the Volume Oscillator. Are you ready to learn about this efficient indicator?
1. Volume Oscillator Defined
The Volume Oscillator indicator (VO), also known as the Volume Rate of Change (VROC), is a highly effective technical indicator that can help crypto traders understand how strong or weak a price trend is. It focuses on changes in trading volume compared to the recent past, rather than just the actual volume level.
1.1. How Does Volume Oscillator Work
In simple terms, the Volume Oscillator indicator looks at how trading volume is changing over time. When volume is increasing compared to the recent past, it suggests a strong trend. But if the volume is decreasing, it may indicate a weak trend.
1.2. How Does Volume Oscillator Appear
The Volume Oscillator indicator appears as a line below a chart. It moves up and down, above or below a central Zero Line. When it is above zero, it suggests strength in the trend , and when it is below zero, it signals weakness.
2. Simple Method to Calculate Volume Oscillator
Calculating Volume Oscillator is simple. The formula for the Volume Oscillator indicator is as follows:
|Volume Oscillator = [(Shorter Period SMA of Volume – Longer Period SMA of Volume) / Longer Period SMA of Volume] * 100
Let’s break down the calculation process into five parts to understand it better:
- Select the time periods for the shorter and longer moving averages. The shorter one is often set to 14 days or more, while the longer one typically uses 28 days or more. These values can vary based on your trading style and preference. In the TradingView platform, the shorter is 5 and the longer is 10.
- Calculate the Simple Moving Average (SMA) of volume for both the shorter and longer periods. The SMA is just an average of volume over the specified time frame.
- Subtract the longer-period SMA from the shorter-period SMA of volume.
- Divide this difference by the longer-period SMA of volume.
- Multiply the result by 100 to express it as a percentage.
The Volume Oscillator then gives you a percentage value that indicates how much the shorter-period volume average differs from the longer-period volume average.
3. Easy Way to Launch Volume Oscillator on a TradingView Chart
To launch the Volume Oscillator on a TradingView chart, follow these simple steps:
- Open TradingView and select the chart you want to use.
- Click on the ‘Indicators’ button.
- In the search bar, type ‘Volume Oscillator’ and select it from the list.
- You will see the Volume Oscillator settings. Customise it by choosing the short and long term periods for the moving averages based on your preference.
- Click the ‘OK’ button
- The Volume Oscillator indicator will now appear on your chart. Use the indicator to analyse the chart for trading signals.
4. Reading Volume Oscillator: The Basic Signals
Here are the basic signals that you can read from the Volume Oscillator indicator.
- Sign of Strength or Weakness
When the price of an asset goes up or down, at the same time, the trading volume increases, it suggests the strength of the current trend. If the short-term volume moving average (fast) is higher than the longer-term one (slow), and the Volume Oscillator is above the Zero Line, it confirms the price trend, whether it is going up or down.
Conversely, when the price moves up or down, but the volume is decreasing, it indicates the weakness of the trend. If the slow volume moving average is higher than the fast one, and the Volume Oscillator is below the zero line, it shows a lack of strength and confidence in the market.
If both the price and the indicator make the same pattern, it confirms the pattern. For example, if both the price and the indicator make lower highs and lower lows, it indicates a bearish market.
Sometimes, the Volume Oscillator can detect divergences when the price moves up or down, but the volume is decreasing. In such cases, the Volume Oscillator is below the Zero Line. This could be a warning to traders that the current price movement is weak and not supported by strong volume, which might lead to a potential trend reversal.
4.1 Most Popular Application of Using Volume Oscillator in Crypto Trading
The most popular application of the Volume Oscillator indicator in crypto trading is to confirm breakouts.
When the price makes a big move, you look at the Volume Oscillator. If the Volume Oscillator is also showing a strong change in volume at the same time, it confirms that the breakout is real and has strength behind it.
In conclusion, the Volume Oscillator is a simple, yet highly useful tool for crypto traders. It helps traders understand the strength of price trends by looking at changes in trading volume. When price and volume move together, it can confirm strong trends, but when they move in opposite directions, it may indicate weakness or a potential trend reversal. One of its popular uses is confirming breakouts, ensuring traders make well-informed decisions in the exciting world of crypto trading.