Volume Accumulation Oscillator

The VAO (Volume Accumulation Oscillator) was developed by Mark Chaikin and in some cases this technical indicator is called the Chaikin Oscillator. In technical analysis the VAO oscillator is used to show the cumulative volume that is adjusted by the average security price (difference between the close price and the middle point price).

In general all indicators used in technical analysis could be divided into four categories based on the source of the calculation: a) price based indicators; b) volume based indicators; c) price and volume based indicators and d) breadth indicators. The volume accumulation oscillator could be placed in the category of the technical indicators that are based on the volume and price of the analyzed security.

The VAO formula is

VAO = Volume x (Close †Average Price)
Where
Average Price = (High - Low) / 2

Or VAO could be represented as
VAO = Volume x (Close †High + Low) / 2

From the formula above, you may see that if the close price of a security is below the average point (High + Low) / 2 then all of the volume is considered as negative and subtracted from the previous VAO value. If the security close price is above its average point, then the volume is considered positive and is added to the previous VAO value. In this way the negative volume could be considered and negative money flow (out of the security) - when the pressure is on the sellers side and positive volume could be considered as positive money flow (invested into a security) - when the pressure is on the buyers side.

If you compare VAO to OBV (on balance volume) you will find that the volume accumulation oscillator is more sensitive to the price changes of a security. Yet, in the same way as OBV the VAO could be as a trending indicator to confirm a trend. For instance, if the VAO moves up and security price rises then technical analysts would say that the VAO confirms the Bullish trend. In opposite, the declining VAO with dropping security price would confirm the Bearish trend.

In opposite to OBV the volume accumulation oscillator could be used to predict the coming changes in the market trend. The divergence between VAO direction and the security price direction could indicate the possible change in the market sentiment and sequentially signal a possibility of the trend reversal. For instance a signal buy could be generated when the VAO starts to move while a security price is still in decline, and a sell signal could be generated when the VAO starts to move down while security price is still moving up.

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated