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ELITE Swing Trading Breakout Strategy To Trade Stocks Using Volume Oscillator - YouTube
Channel: The Secret Mindset
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Most traders know the popular price oscillators,
like stochastic, the relative strength index
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and so forth.
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But few traders know about or use volume oscillators,
a far more important category.
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While price oscillators are used mostly to
reveal overbought and oversold price conditions
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with a high and low percentage range, volume
oscillators can help identify the energy behind
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the move.
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Volume oscillators can expose market energy
of all kinds as well as reveal the shift of
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energy from up to down and vice versa.
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Being able to identify an increase in volume
or a shift in direction can help the short-term
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trader determine the duration and sustainability
of the current price action.
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This can also help screen out weaker stock
picks and ascertain when to exit a trade.
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In today’s institutional activity–based
market, the volume oscillator can reveal buying
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and selling patterns before price begins a
major move.
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This is because many of the large institutions
are careful not to disturb price, as they
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buy incrementally.
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The standard volume oscillator available for
most charting software is a center line oscillator.
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Instead of oscillating between a high range
and a low range the way most price oscillators
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do, center line volume oscillators move above
and below a zero line.
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The center line exposes the volume energy
behind the price action for both buy and sell
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sides.
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The Volume Oscillator consists of two moving
averages of volume, one fast and one slow.
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The fast volume moving average is then subtracted
from the slow moving average.
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• if the fast MA is above the slow MA the
oscillator will be positive.
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• If the fast MA is below the slow MA then
the oscillator will be negative.
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By watching the volume oscillator, you can
take your projections to a more analytical
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level to anticipate price changes before price
reverses on the short-term trend.
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And being able to anticipate price action
well ahead of the event is an advantage when
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the market is moving with velocity.
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So how and when to use it?
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There are numerous ways you can use a volume
oscillator to speed up your trade analysis.
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The volume oscillator is easy to read because
of its center line.
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As the volume indicator moves up above the
center line, it indicates accumulation or
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rising interest in the stock to the buy side.
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As long as the indicator remains above and/or
oscillating near the center line, buyers will
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dominate stock activity and the bias will
remain to the upside on the short-term trend.
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When the volume oscillator heads down and
moves well below the center line, a distribution
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or selling pattern is occurring.
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For short-term trading, this can be profit-taking
after a big up move.
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A positive value suggests enough market support
exists to continue driving price activity
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in the direction of the current trend.
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A negative value suggests a lack of support,
indicating that prices may become stagnant
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or reverse.
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An increase or decrease in price fueled by
an increase in volume may be considered a
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sign of strength in the prevailing trend.
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Therefore, when the fast volume moving average
(default 14-period) is above the slow volume
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moving average (default 28-period), the Volume
Oscillator is above the zero line and may
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be confirming price direction, whether it
be up or down.
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An increase or decrease in price fueled by
a decrease in volume may be considered a sign
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of weakness in the prevailing trend.
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Therefore, when the fast volume moving average
is below the slow volume moving average, the
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Volume Oscillator is below the zero line and
may be warning that the price direction is
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lacking strength and conviction.
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In this chart, the fact that price is making
higher highs and higher lows might be viewed
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by many traders as a bullish sign.
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When the price increases is combined with
the Volume Oscillator making higher highs
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and higher lows, a trader may consider this
to be even more bullish.
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On this daily chart example, as price moves
up during this period, the volume oscillator
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pattern forms lower highs, indicating a weakening
of upside energy.
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So when the price was increasing, the Volume
Oscillator was not confirming the price movement
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because it was decreasing, making repeated
lower highs and lower lows.
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This bearish divergence indicated that the
recent price increases were not being made
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with volume strength.
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By studying these patterns carefully, you
can anticipate and prepare for reversals and
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retracements prior to price actually changing.
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For this reason, the Volume oscillator is
a great confirmation indicator.
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You can use it to confirm a breakout of support
or resistance.
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For example, a breakout of resistance which
goes hand in hand with an increase in volume
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indicates a strong move.
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This is a great to spot false breakouts.
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In this second example we have a breakout
to the downside.
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Notice how the price approaches the previous
swing low, and the volume oscillator spikes
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higher.
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The way you should read this is that the amount
of selling pressure increased on the retest
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of the second low.
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However, the volume oscillator will provide
a ton of false signals when the market is
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in tight ranges.
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The price and volume action will look non-existent,
yet the oscillator could be moving above and
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below the 0 line.
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This is really annoying because the appearance
of underlying strength or weakness is nothing
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more than a false signal.
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For this reason, I like to use the volume
oscillator along with a price oscillator.
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Contradicting price oscillators
One of the most important advantages when
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using a volume oscillator in conjunction with
a price oscillator such as stochastic or the
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RSI is when a contradiction occurs between
the volume oscillator and the price oscillator.
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Such contradictions are known as divergences
or convergences between indicators.
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In this chart, you can see an example of a
contradiction between the stochastic and volume
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oscillator.
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The stock is building a platform, which is
a common sideways pattern that develops as
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institutional investors move into a stock
without moving price out of a tight range.
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Institutional investors are the most dominant
of the market participant groups and their
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activity often goes unnoticed because they
use controlled bracketed orders that maintain
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price at certain levels.
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Stochastic oscillator is dropping below its
overbought 80 line while the volume oscillator
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is heading upward as the platform develops.
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This creates a divergence pattern between
the stochastic and the volume oscillator.
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This pattern is a leading indication that
the platform will break to the upside, which
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can be a critical piece of information for
position and swing traders.
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IN this example, the stock formed a platform
during several months.
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Stochastic was overbought during that period
then slipped downward during the platform
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stage.
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However, the volume oscillator continues to
rise during this period, followed by an upside
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breakout move.
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During moderately trending markets, when most
price oscillators fail to oscillate but form
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a floating pattern at their overbought line,
a volume oscillator can be an invaluable analysis
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tool for swing and position traders, exposing
weakening price action before a retracement.
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This chart shows a spike on the volume oscillator
during a platform and prior to the move up.
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This is an indication of heavy institutional
investor activity that tend to use controlled
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bracketed orders that do not move price during
the accumulation phase.
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As the stock moves up, the volume oscillator
hovers around its center line, indicating
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steady consistent volume activity, until the
volume oscillator suddenly forms a divergence
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with price, just prior to the topping action.
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Volume oscillator and gaps
Platforms and bottoms often have huge up gaps
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due to institutional short-term and high-frequency
traders who trade aggressively when they discover
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that their counterpart, the institutional
investor, has been accumulating.
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Their large lot speculative buying patterns
drive price up in sudden, explosive moves.
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The volume oscillator can be a useful tool
in finding stocks poised for a huge gap.
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In this example, you see an overbought stochastic
as the volume oscillator turns upward and
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moves above its center line.
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Although price is sideways, volume is building
energy during this bottoming phase.
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And here’s the gap that formed shortly thereafter.
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The volume oscillator indicated heavy buying
activity prior to the huge gap.
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By using the volume oscillator with stochastic,
swing and momentum traders are able to enter
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the stock prior to the gap price action, thereby
increasing their profits significantly.
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That’s why the volume oscillator can be
an additional analysis tool to use with price
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oscillators to help expose strengthening or
weakening volume patterns that often precede
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changes to price action and direction.
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As with all indicators, the volume oscillator
requires study and practice to use it properly
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and learn its nuances.
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Extreme oscillation patterns can reveal shifts
of sentiment and bias from buyers to sellers
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and from short sellers to buyers.
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The indicator is ideal for short-term trading
styles and can show buying patterns of the
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institutional investor during platform markets
when price action appears to be range bound.
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However, the volume oscillator is an advanced
indicator and should be used by traders who
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have some trading experience and a strong
knowledge base of price oscillators and other
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indicators.
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Beginner traders, however, will need to first
learn price oscillators and various volume
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indicators before attempting to use the volume
oscillator.
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