The work of a volume oscillator is to measure volume by measuring the relationship between two moving averages. The volume oscillator indicator calculates a fast and slow volume moving average. The difference between the two is then plotted as a histogram. The fast volume moving average is usually over a period of 14 either days or weeks. The slow volume moving average is usually 28 either days or weeks. On a regular basis, analysts argue over whether or not the lengths of these time periods are appropriate. Some analysts believe that 14 and 28 are too conservative while others argue these numbers are not conservative enough.
Here we use use 5/20 like a short-term trader. The histogram, like an oscillator, fluctuates above and below a zero line. Volume can provide insight into the strength or weakness of a price trend. This indicator plots positive values above the zero line and negative values below the line. A positive value suggests there is enough market support to continue driving price activity in the direction of the current trend. A negative value suggests there is a lack of support, that prices may begin to become stagnant or reverse.
If a market is rallying, the volume oscillator should rise. When the issue becomes overbought, the oscillator will reverse its direction. If the market is declining or moving in a horizontal direction, the volume should contract. Always keep in mind that we are measuring changes in volume, and volume expands during a sell-off. It is important to note that an increasing price together with declining volume is always, without exception, bearish. When the market is at the top, one would therefore see an oversold volume chart. Another important fact is that rising volume together with declining prices is also bearish.