Vao

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Patent #: US 7,831,984 B2
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Volume Accumulation Oscillator

Volume Accumulation Oscillator (VAO) was created by Mark Chaikin to show the cumulative volume adjusted by price (difference between the closing and the midpoint prices). VAO belongs to the group of volume/price-based indicators (studies) in technical analysis.

VAO = Volume x (Close - (High + Low) / 2)

If the closing price of a stock (index) is above the middle point (Close-High+Low), all of the volume is assigned to the buyers, but if the closing price is below the middle point, all of the volume is assigned to the sellers. VAO assigns volume according to the relationship between the closing price and the average price for the day (see S&P 500 VAO chart below).

VAO is considered to be more sensitive to the volume-price relationship than the On Balance Volume (OBV), Like the OBV, the Volume Accumulation Oscillator can be used in technical analysis to confirm a trend. A rising price with a rising VAO indicates a Bullish market, while a falling price with a declining VAO indicates a Bearish market. A divergence of the price direction and the Volume Accumulation Oscillator may indicate a change in market sentiment and a near-term price correction. 

Chart 1: Volume Accumulation Oscillator (VAO)

Interpretation

Divergence of the VAO trend and the price movement can be used in technical analysis as a sign of a forthcoming trend reversal. In this way, the Volume Accumulation Oscillator helps to identify resistance and support levels by comparing volume to the price action.

The VAO is especially valued when the stock (security) price is establishing new highs/lows while the oscillator begins to move in an opposite direction. The "Buy" Signal can be generated when the VAO begins to rise while the price is still moving down. Similarly, the "Sell" signal can be generated when, in a rising market, the VAO begins to decline.

It is good practice to use the Volume Accumulation Oscillator in conjunction with other technical indicators in a trading system. For instance, using a simple moving average (MA) may help to identify a security trend. In this case, a "Buy" signal could be generated when the VAO starts to rise while the stock (security) price is still below the MA (price still declining), and a "sell" signal could be generated when the VAO starts to decline while the stock (security) price is still above the MA (price still moving up).

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