You can’t know for sure when a price reversal is going to happen in the market, but the Klinger volume oscillator tries hard to help by comparing volume to price.
When a trader is looking for reversals it can be helpful to know how many units of a particular index or security are in play between a pair of start and end points in a period. That’s where the Klinger volume oscillator comes in.
If your trading software’s take on time and volume data isn’t very granular—perhaps it can only manage a snapshot of a day’s duration at best—the Klinger volume oscillator will only be effective on timeframes at that level or greater, like weekly or monthly.
The Klinger Volume Oscillator Calculation
The majority of oscillators base their outputs on the difference between a pair of different moving averages – in this instance exponential moving averages or EMAs.
If a shorter EMA (fewer periods) has a bigger value than a lengthier one (more periods), the price is on an upswinging trend.
Shorter moving averages take account of price information from the recent past in relation to prolonged moving averages, which are informed by earlier data.
For instance, with a traditional technical analysis approach, a bullish sign would be inferred from when a 50-period moving average breaks north of a 200-period moving average. This only happens because a 50-period MA reacts more strongly to the present price than a 200-period MA.
Here’s the formula that the oscillator uses:
Volume Force = volume * trend * temp * 100
With this formula, volume is however many units of a security, an index, currency, or contract were traded over a specific duration.
Trend combines the high, open, and close prices into one value that it then compares to a prior reading of this combo to reveal which way the trend is going. If it’s on the up it’s given +1 value, with -1 naturally enough for a down trend.
The “temp” value is a bit more involved, as it takes into account a greater number of variables. The dm and CM terms it uses rely on many if/then statements, with dm being the high price minus the low price. We get the CM value by taking the low from the high price over the previous period and adding it to dm. If CM equals zero, then temp is -2. If CM has either a plus or minus value then it’s equal to the absolute value of (dm/CM – 1)x2.
The calculation volume x trend x temp x 100 is used to stop the final output – the “volume force” – being a decimal.
Taking the Volume Force’s Exponential Moving Average
Next, it takes two exponential moving averages of the volume force. The default settings are a 34-period and a 55-period EMA (you can set your own values if you want) and the value of the former is subtracted from the value of the latter.
So, if the 34-period EMA’s reading is higher than the one for the 55-period EMA, the volume oscillator is going to be more than zero. If the 34-period EMA is rising compared to the 55-period EMA, it’s trending upwards.
When the 34-period EMA drops under the 55-period EMA, the oscillator is below zero and if this continues it’s showing a downwards trend.
What to Use the Klinger Volume Oscillator For
The Klinger volume oscillator is often used in conjunction with a 13-period moving average, probably an exponential moving average. It’s not always used in isolation and might need to be plotted. You can do this by adding a moving average to the oscillator’s box.
If the 13-period EMA goes across the oscillator while it’s experiencing an upswing, we take this as a sign of bullishness. Naturally, if the same thing happens while it’s in a downswing, we infer the opposite, a sign of bearishness.
So, the Klinger volume oscillator is a tool that points towards trend reversals. The concept that underpins it is called “volume force”, and this is the only indicator where you will find it used. It’s rather involved as it uses various different calculated elements, but essentially, its strongest influencers are volume and trend.
Entering a trade is usually confirmed by a signal line crossing the oscillator.
If this happens when the oscillator is trending in an upward direction it’s interpreted as a signal to buy/go long. A downward oscillator trend points to a sell/short signal.
A lot of technical analysts see volume and price divergences as instrumental. High asset volume with price trending sideways or down, can mean that the current downtrend is about to go the other way. And it’s the same in the other direction. If price is rising while volume is going down it could be a sign of low buying pressure.
The Klinger volume oscillator as a useful tool, but it should only be used as part of a suite of others.