VolumeZoneOscillator

Description

The Volume Zone Oscillator (VZO) is a technical indicator analyzing volume changes in relation to certain levels (zones). Unlike VolumeOsc, the VZO uses price data along with volume.

Two averages are calculated for the VZO: the first one is price related EMA of volume, the second is general EMA of volume. The first EMA takes into account volume with sign like OnBalanceVolume: the volume is considered negative when the Close price of the corresponding bar is lower than that of the previous bar, and positive otherwise. Once these averages are calculated, their percentage ratio is the resulting plot.

Several levels are introduced to analyze the VZO plot: "+60", "+40", "+15", "-5", "-40", and "-60". These numbers represent corresponding percentage values. For additional confirmation, it is suggested that the VZO plot be accompanied with 60 period EMA and 14 period ADX. These two studies are used for checking trend existence and direction. ADX values higher than 18 suggest that the market is trending, otherwise the non-trending mode is spotted. When the market is trending, the trend direction can be defined using the EMA: the price crossing above the EMA suggests the uptrend, otherwise the downtrend is detected. When the trend mode and direction are defined, use the crossovers of the VZO with corresponding levels as Buy and Sell signals for long and short positions (see plots' descriptions for details).

 

Input Parameters

Parameter Description
length The number of bars used to calculate the EMAs for the oscillator.

Plots

Plot Description
VZO The Volume Zone Oscillator plot.
+60 The "+60" level. Crossing this level from above is considered a Sell signal to close a long position in an uptrend market (ADX > 18, price above the EMA).
+40 The "+40" level. Crossing this level from above is considered a Sell signal to open a short position in a downtrend market (ADX > 18, price below the EMA). It is also considered a Sell signal in a non-trending market (ADX < 18).
+15 The "+15" level. Crossing this level from below is considered a Buy signal for a long position in a non-trending market (ADX < 18).
-5 The "-5" level. Crossing this level from above is considered a Sell signal for a short position in a non-trending market (ADX < 18).
-40 The "-40" level. Crossing this level from below is considered a Buy signal to open a long position in an uptrend market (ADX > 18, price above the EMA). It is also considered a Buy signal in a non-trending market (ADX < 18).
-60 The "-60" level. Crossing this level from below is considered a Buy signal to close a short position in a downtrend market (ADX > 18, price below the EMA).
ZeroLine The Zero Level. Crossing this level from below is considered a Buy signal to close a short position after a bullish reversal (ADX > 18, price goes above the EMA); crossing this level from above is considered a Sell signal to close a long position after a bearish reversal (ADX > 18, price goes below the EMA).

Example*

*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.

Further Reading

1. "In the Volume Zone" by Walid Khalil and David Steckler. Technical Analysis of Stocks & Commodities, May 2011.

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