Walid Khalil introduced the Volume Zone Oscillator (VZO) in 2009 Journal of the International Federation of Technical Analysis, And published a follow-up article with David Steckler, which appeared in Technical analysis of stocks and commodities The May 2011 issue.ofThese articles outline a money flow indicator that contains simple transaction triggers and is closely related to balanced trading volume (OBV). Since then, this new tool has received widespread attention and is now included in many chart packages, but it requires more testing and experience to fully evaluate its potential.
The oscillator divides daily trading volume activity into positive and negative categories. When the current closing price is higher than the previous closing price, it is positive, and when it is lower than the previous closing price, it is negative. The generated curve is drawn by relative percentage levels, generating a series of buy and sell signals, depending on the level and the direction of the indicator. (Also take a look: Introduction to Oscillator.)
The formula of the volume zone oscillator is:
VoltZOh=1×TonVoltVoltphosphorusWhere:Voltphosphorus=Volume position=X–Periodic EMA(± volume)TonVolt=Total volume=X–Period EMA (volume)
The default period is 14, but it can be adjusted after the backtest.
This calculation creates a daily variable “R”, which contains an up or down reading of the volume, depending on the session or price bar. The VP and TV results are smoothed using exponential moving averages, and the final number is multiplied by 100 to create a percentage scale on the indicator panel. When the cumulative R is positive, the oscillator moves higher, when it is negative, the oscillator lowers.
When VZO is above and maintained at the 5% level, it points to a positive trend, and when it is below the 5% level and does not turn higher, it points to a negative trend. An oscillation between 5% and 40% marks a bullish trend area, while an oscillation between -40% and 5% marks a bearish trend area. At the same time, readings higher than 40% indicate overbought status, while readings higher than 60% indicate extreme overbought status. Or, a reading below -40% indicates an oversold state, and a reading below -60% becomes extremely oversold.
The horizontal line displayed on the indicator panel corresponds to the relative percentage level that triggers the buy and sell signals at the crossover:
- Buy or cover signal-cross from below to above -40% line.
- Sell or sell short signal-40% line cross from above to below.
- Small buy or cover signal-5% line cross from below to above, but any subsequent violations will increase the 7.5% buffer before the next buy signal.
VZO can use 14-period Average Directional Index (ADX), values greater than 18 point to trending markets. When ADX sends out a trend signal, it checks the 60-period Exponential Moving Average (EMA). A price crossing the moving average indicates a positive trend, while a downward cross indicates a bearish trend. These values should be adjusted and optimized by back-testing specific securities.
You can check price patterns and other indicators to confirm VZO buy or sell signals. The common volume bars on most price charts provide useful information in this regard, increasing the reliability of the signal when bullish and bearish crossovers coincide with twice or greater average volume. In addition, when the VZO exceeds 50%, the search OBV will be higher, and when it is below this level, it will be lower.
Penn National Gaming (PENN) experienced a volatile upward trend as shown in the above chart in the first half of 2015, and finally broke through an important new high in July. VZO issued two main buy signals during this period, in December and June. Both appeared before a strong uptrend, which could have brought huge profits. This period produced two effective sell signals in February and April, but the additional signals in January, May, and June reduced credibility because they coincided with higher prices.
The Volume Area Oscillator provides a new method for volume-based trend signals, taking clues from classic balanced volume indicators, and adding smoothed averages to trigger buying and selling at different trend movement levels Signal.