Trading Volume
Spikes
(part 2)
Using
Volume Moving Averages (VMA) and the Percentage Volume
Oscillator (PVO)
Above, we discussed how
the magnitude and duration of a volume spike can impact
the extent of a future trend reversal. In order to be
able to gauge these parameters objectively, it is
imperative that we apply appropriate mathematical tools
to the study of volume spikes.
The Percentage Volume
Oscillator (PVO) fits this purpose. It represents the
relationship between two volume moving averages. The
formula to calculate PVO is simple
PVO = ([Fast VMA] -
[Slow VMA]) / [Slow VMA], where
-
VMA = a volume moving
average;
-
The �fast VMA�
represents a short-term VMA;
-
and the �slow VMA� is
a longer-term VMA.
Compared to the short-term (i.e., the �fast�) VMA, the
long term (i.e., the �slow�) VMA represents an average
of the volume readings over a comparatively longer
period of time.
For instance, assume you saw a large volume spike
develop on an index over the past two days. Let us say,
you calculate the PVO at this point, using a 2-day VMA
as the fast VMA and a 25-day VMA as the slow VMA. A PVO
calculation would then give you the magnitude of the VMA
spike that had duration of two days.
Returning to the example presented above, if you
calculated the PVO for the two-day volume surge you
noted, but decided to use a 5-day VMA rather than the
2-day VMA as the fast VMA (keeping the 25-day VMA as the
slow VMA), results would differ greatly. Since the
high-volume activity in our example occurred only over a
two-day span, the 5-day VMA would show lower values than
the 2-day VMA because the former would consist of an
average of 3 �low-volume days and two high-volume days.
By maintaining the slow
VMA at a steady level and altering the period of the
fast VMA, one can define the minimum duration of a VMA
spike under analysis.
While the fast VMA defines
the duration of a VMA spike, the PVO value is used to
characterize the magnitude of a volume spike. The
greater the PVO value, the larger a spike's magnitude,
and by extension, the bigger the potential impact on the
market trend.
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Chart 1: |
Example of an
intraday application of the PVO.
S&P 500 index. April 22, 2005.
Fast VMA = 15 minute volume moving average;
slow VMA = 1-day volume moving average. |
 |
The main advantage of the PVO indicator lies in its
absolute value. When analyzing historical market data,
various PVO values can be compared objectively -
critical PVO levels for a specific index can thus be
determined in an (emotionally) unbiased way.
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