Volume Zone Oscillators Explained

Volume Zone Oscillators Explained
Photo by Behnam Norouzi / Unsplash

The meaning of Volume Zone Oscillators

Walid Khalil and David Steckler published the Volume Zone Oscillator (VZO) in Stocks and Commodities Magazine in May 2011. The VZO derives its oscillating value from price, historical price, and moving averages. It is a leading indicator that generates buy and sell signals based on oversold and overbought conditions. A 60-period Exponential Moving Average and a 14-period Average Directional Movement Index are also used by the VZO system (ADX). The user has the option of changing the input (close), method (EMA), and period lengths.

This new method has gained popularity since then and is now included in many charting packages, but additional testing and experience will be required to adequately evaluate its potential.

The oscillator categorizes daily volume action as positive or negative. It is positive when the current closing price is higher than the prior closing price and negative when the current closing price is lower than the prior closing price. The resulting curve traces through relative percentage

levels, yielding a series of buy and sell signals based on the level and movement of the indicator.

The Volume Zone Oscillator Formula:

VZO = 100*(VP/TV)

Where,

VP = Volume Position = X- period EMA (+/- volume)

TV = Total Volume =X- period EMA (volume)

The period is 14 by default, however, it can be modified after backtesting.

Depending on the session or price bar, the algorithm generates a daily variable "R" that contains an up or down volume reading. Extensive moving averages are used to smooth the VP and TV results, and the final figures are multiplied by 100 to provide a % scale on the indicator panel.

When the cumulative R is positive, the oscillator travels higher; when it is negative, the oscillator moves lower.

How to interpret the Volume Zone Oscillators?

When the VZO rises above and holds the 5% level, it indicates a positive trend; when it falls below the 5% level and fails to turn higher, it indicates a negative trend. Oscillations between 5% and 40% indicate a bullish trend zone, whilst oscillations between -40% and 5% indicate a negative trend zone. Meanwhile, values above 40% indicate an overbought position, and readings above 60% indicate a severely overbought condition. Readings below -40%, on the other hand, suggest an oversold condition, which becomes very oversold below -60%.

The indicator panel displays horizontal lines that correlate to the relative percentage levels and, when crossed, generate buy and sell signals:

● Buy or Cover Signal: cross from below to above the -40 percent line.

● Sell or Sell Short Signal: cross from above to below the 40 percent line.

● Lesser Buy or Cover Signal: crossing from below to above the 5% line, but any consecutive violation adds a 7.5 percent buffer zone before the next buy signal.

With the VZO, a 14-period average directional index (ADX) can be employed, with values greater than 18 indicating a moving market. When ADX indicates a trend, a 60-period exponential moving average (EMA) is analyzed, with price crossing above the moving average defining a positive trend and price crossing below the moving average denoting a negative trend. Backtesting specific securities should be used to alter and optimize these parameters.

To confirm VZO buy or sell signals, price patterns and other indications can be analyzed. When bullish and bearish crosses line with two times or greater average volume, volume bars, which are typical on most price charts, provide useful information in this regard, contributing to signal dependability. In addition, expect OBV to rise when the VZO rises above 50% and fall when it goes below that level.

The volume zone oscillator takes a novel method to volume-based trend signals, borrowing from the classic on-balance volume Indicator and including smoothing averages to generate buy and sell signals at various degrees of trend movement.


Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.

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