Volume Oscillator: is volume rising or falling, as a percentage

What it measures

The Volume Oscillator is the difference between a short and a long moving average of volume, expressed as a percentage of the long one.

It answers one question: is activity picking up or dying down, relative to its own recent norm.

It is deliberately directionless. It cannot tell you whether the volume was buying or selling, and treating a positive reading as bullish is the most common error made with it.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Compute a short moving average of volume, conventionally five periods.

2. 2

   Compute a long moving average of volume, conventionally ten or twenty.

3. 3

   Subtract the long from the short and divide by the long.

4. 4

   Multiply by one hundred.

Settings

Five against ten is common and very fast. Widening the long average to a full day of bars on an intraday chart removes most of the seasonal artefact.

How to read it

• Positive means recent activity is above its own baseline, which confirms whatever price is doing rather than predicting it.
• A breakout on a positive reading is being participated in; the same breakout on a negative reading is not.
• Falling volume during a trend is the classic exhaustion warning, and this is the cleanest way to see it.
• It is a confirmation overlay for other analysis and produces no signals of its own.
• Pair it with a breakout rule and it becomes a filter worth having: a level break with the oscillator negative is happening on below-average participation, and those are the breaks that most often fail back into the range within a few bars.
• It also makes exhaustion visible during a trend: a market still making new highs while the oscillator falls is being carried by progressively fewer participants, which is how most trends end.

Where it misleads

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