Monday, June 4, 2012

How To Use A Volume Oscillator To Identify Topping Patterns

MetaStock SPRS Series - Week 71 - TechniTrader® Stock Discussion for MetaStock Users - How To Use A Volume Oscillator To Identify Topping Patterns - June 4, 2012
By: Martha Stokes C.M.T.

Topping patterns can be difficult to identify early on, before the sudden declines in price. Using a volume oscillator can help traders see the top before it actually completes.

Volume Oscillators are not as well known as price oscillators. But as the large lot market participants continue to dominate the stock market activity, price oscillators fail more and more often.


This is because often times when certain large lot market participants are selling a stock, price is holding steady in a sideways pattern, a platform, or even a consolidation. The only way to determine whether the large lots are on the buy side or sell side is through volume patterns.

Volume oscillators are ideal for sideways patterns and can expose the large lot activity within a tight sideways price action.

This allows traders to prepare for the breakout and down price action before it happens which gives traders a decided advantage in this High Frequency Trading Firm environment.

Entering before price collapses increases selling short profitability.

Volume Oscillators are usually written with a center or Zero line with parameters that range from 100 to 1000.

Chart 1

The center line volume oscillator defines the accumulation mode rising above the center line and the distribution mode with price below and or moving down from the center line.

When you first look at the chart above it is obvious it is sideways with an end of February drop that quickly recovered and another drop that has not.

By studying the patterns that formed on the TechniTrader® Volume Accumulation TTVA Indicator it is easy to see, that this stock was already at risk of a top after the steep ascent and peak of volume in early November. The following peak in early February is a lower high peak, and the March low V volume rises slightly but not above the center line of TTQA. Instead during the sideways pattern, the volume oscillator remains below the center line wavering in a downside pattern indicative of distribution before price moves down.

Learning to read volume oscillators may take some time but their ability to expose whether large lots are distributing or accumulating during choppy sideways markets is invaluable.

For most traders, knowing the direction a stock will take out of any sideways pattern is a challenge. Incorporating volume oscillators will help define distribution versus accumulation.

With over 80% of all market activity now large lot action, and since so many institutions use controlled bracketed orders that do not move price, using volume oscillators during sideways markets is critical to identifying tops earlier to prepare for downside price action and selling short.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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