Traders use the percent volume oscillator (PVO) to measure volume change, but what is this and how does it work? Discover the essentials in this guide!
In trading, the percent volume oscillator (PVO) is utilized to measure volume change via two moving averages: “fast” and “slow”.
A lower moving average is used with the fast moving average, which makes it more reactive to fluctuations in volume. The slow moving average utilizes a quicker period, making it less reactive. These are then subtracted from each other.
The volume’s rate of change will fluctuate across time, and volume is unable to rise or fall exponentially over sustained periods. The indicator will oscillate accordingly over time.
Charting platforms will usually present a second line alongside the PVO display: this is an exponential moving average of the percent volume oscillator itself. Another way to put this is that if we consider PVO as similar to the first derivative of volume (the volume’s rate of change), PVO’s exponential moving average may be interpreted as the second derivative of volume (roughly) or the rate of change in the rate of change in volume.
Many prefer to take advantage of the exponential moving average of the PVO, whereas others choose not to. Generally, it’s included in the default settings of charting software (though it can be taken out).
The PVO will be effective on those markets which actually record volume data only. On specific markets and charting timeframes, the PVO will fail to plot because of the lack of associated volume.
So, volume data is only aggregated for individual stocks on a lot of charting platforms, while volume might not be collated on numerous markets (such as stock indices) on charting timeframes below the everyday level.
Exploring PVO Settings
The PVO default settings are similar to those of the MACD (moving average convergence divergence), but they can be altered to suit your preferences. The fast moving average is set to 12 periods by default. The slow moving average is at 26 periods.
These stem back to the age in which trading weeks ran for six days, not five. This means 12 periods related to two weeks, while the 26 periods covered data from a whole month. The 9 period EMA would stand for one week and a half’s data.
Short-term traders will find the shorter settings work best for them: five periods for the fast moving average and 21 periods for the slow moving average would cause the PVO to become more sensitive, triggering more choppy activity and making oscillations more frequent.
But for longer-term traders, a 21 period for the fast moving average and 42 period for the slow moving average would potentially work better, as the trajectory would become smoother.
Interpreting the PVO
Volume relates to the amount of shares, or amount of a specific market item, purchased during a set timeframe. Apple, for example, tends to trade a monumental 30-40m shares daily.
There are no equations or weighting criteria required, which is why it’s one of the simplest indicators for traders to grasp. Many technical analysts choose to track volume, as it’s generally assumed to precede changes in price. For instance, if the market moves down and a large volume swell occurs, this could be an indication that buyers are entering the market to ease price back in the opposite direction.
With PVO, a positive value demonstrates that the recent trend in volume’s rate of change is, as you may have assumed, positive. This could indicate that there’s adequate support among traders to keep price shifting in the direction of the prevailing trend. If there’s no trend in volume’s rate of change, it’s possible that one will develop sooner rather than later.
However, a negative value suggests that the rate of change in volume is dropping, which could lead to stagnation or even a reversal in price. Market moves without an attendant volume amount tend to be regarded as holding low credibility: many chartists would feel that a turn in the market may lie on the horizon.
By viewing volume via its rate of change, the PVO helps to accomplish this task.
Using Percent Volume Oscillator for Your Trades
It’s important that you don’t base your trading decisions off the PVO itself solely: you need to gather insights from various sources, as with many other tools.
Instead, PVO can help you determine specific price movements’ validity — one easy warning signal to watch out for is prices dropping or rising regardless of weak or falling volume.
The PVO assists traders in determining how price may move as a result of the rate of change in volume. Here are some rules to consider with regards to volume’s rate of change as it relates to price.
- When price moves in one or another direction, and is accompanied by dropping volume (values beneath zero on the percent volume oscillator), this trend is typically considered to be lacking credibility.
- If price trends in one direction or another, and is accompanied by rising volume (values higher than zero on the percent volume oscillator), the trend will generally be viewed as legitimate.
- When price consolidates and volume rises, a material movement in price might be imminent. You can’t identify which direction the price move will go from volume itself.
- If trends in either direction are overextended, the percent volume oscillator may change to the reverse direction itself. So, if a market rallies on low volume, the PVO may accelerate to a value that’s positive or more positive. But if a market rallies on high volume, the PVO will probably decelerate to a negative (or less positive) value when the move runs its course.
- Should we decide to express much of this as mathematical formulas with regards to market prices, it may look like:
- Falling volume + rising prices = bearish
- Increasing volume + dropping prices = bearish
- Falling volume + dropping prices = bullish
- Increasing volume + rising prices = bullish
The percent volume oscillator, though, can’t be utilized to time trade entries. Instead, it can warn traders of market behavior that’s unsustainable in the long run.