Klinger Oscillator and Percentage Volume Oscillator

In the world of technical analysis there are an endless variety of technical indicators. In fact, there are so many indicators that it is often difficult to distinguish between one and another. Many are variations of the same theme using the same input parameters and producing similar results.

Before developing a trading strategy it is important to wade through the raft of available technical indicators and determine what they actually do, then choose those that are unique, combine well with other indicators and most importantly, provide a trading advantage.

As an example, if a trader is intent on using Chaikin Money Flow then it probably doesn't make any sense to also choose the Klinger Volume Oscillator as part of the same stock trading strategy. Both of these indicators are based on accumulation and distribution of shares and both use price and volume as inputs.

Another example would be to select both the Stochastics Oscillator and Relative Strength Index (RSI) for use as overbought/oversold indicators. Both indicators deal with short-term price extremes and capitalize on a tendency for mean reversion.

One easy way to avoid overlap of functionality is to first determine the most important input parameters, then choose one technical indicator for each parameter. One could arguably say that the two most significant trading factors are the security's price and volume (in that order). Price is an obvious choice but stock volume is often ignored. Volume is important because it provides a clue to whether the security is in demand, or alternatively whether the stock is being dumped. With both directions of price movement, the greater the volume the more significant the price action is.

Selection of a price-only trading signal is a relatively easy thing to do. For example, a trader could use an RSI, Stochastics, Simple or Exponential Moving Average (EMA), or a multitude of others. However, it is not so easy to find a volume-only technical indicator. There are plenty of combined price/volume indicators such as the Klinger Oscillator and Chaikin Money Flow, both mentioned above. But they do not provide the price-independence that is being sought for the second indicator.

There is one volume-only indicator called the Percentage Volume Oscillator (PVO). There may be others out there but they are likely based on a similar formula. The PVO is calculated by subtracting the fast EMA from the slow EMA of volume as a percentage. Increasing volume is detected when the Percentage Volume Oscillator fluctuates around the zero line with increasing oscillator values. Decreasing volume is determined when the PVO fluctuates around the zero line with decreasing oscillator values.

An important use of the Percentage Volume Oscillator is when a stock breakout occurs. Such breakouts do not always succeed and instead of reaching new highs they often drop back to less lofty heights. You can generally judge the quality of the breakout based on the PVO. If a stock breaks out on significantly higher volume then the breakout will likely succeed. Conversely if the volume is below average then the stock price will probably fall back after a few days.

Steve Auger is a freelance writer and the administrator of the website stockmarketstudent.com. Stock Market Student includes an encyclopedia of stock market terminology, providing additional information on the technical indicators Percentage Volume Oscillator and Klinger Oscillator.