One of the popular oscillators used to predict upcoming reversals using volume and price is the Klinger volume oscillator. Interestingly, the Klinger Oscillator can be used to point to upcoming short-term fluctuations as well as track the long-term flow of money moving in and out of a stock. Let’s learn more about this oscillator.
What is Klinger volume oscillator?
Developed by Stephen Klinger, the Klinger volume oscillator basically measures trends of money flows based on volume. It is typically used as a confirmation indicator.
Klinger volume oscillator uses high price, low price, close price, and volume to create something called as a volume force (VF). It is basically the difference between the numbers of shares accumulated and distributed each day. Then, this VF is turned into an oscillator by subtracting the slow EMA of VF from the fast EMA of VF.
There is also a signal line (KOS) for triggering trading signals. This KOS is basically the 13-period EMA of the Klinger Oscillator (KO). Typically, the default setting is the 34-period EMA (fast EMA) and a 55-period period EMA (slow EMA). This can be customized.
The figure below shows the Klinger volume oscillator.
Klinger oscillator and Uptrend/ Downtrend
- Uptrend: When the 34-period EMA has a higher reading than the 55-period EMA, the value of the oscillator will be greater than zero. Whenever the 34-period EMA is getting higher in value when compared to the 55-period EMA, the oscillator is said to be in an uptrend.
- Downtrend: When the 34-period EMA has a lower reading than the 55-period EMA, the value of the oscillator will be less than zero. Whenever the 34-period EMA is getting lower in value when compared to the 55-period EMA, the oscillator is said to be in a downtrend.
Klinger oscillator and Divergence
The Klinger Oscillator uses divergence to recognize when price and volume do not confirm the direction of the move.
- Bullishness: When the value of the indicator is moving upward while the price of the stock continues to fall, it is considered as a bullish sign.
- Bearishness: When the price increases, but the value of the KVO is negative, it is considered as a bearish sign.
How Traders Use Klinger oscillator
Traders use the Klinger volume oscillator for identifying the bearish and bullish signals.
Bullish Signals
- When the 13-period EMA crosses above the oscillator while the stock is in a clear uptrend, traders go long.
- When the 34-period EMA is getting higher in value when compared to the 55-period EMA (oscillator is above zero), traders go long.
- When there is a bullish divergence between price and KVO, traders go long.
Bearish Signals
- When the 13-period EMA crosses below the oscillator while the stock is in a clear downtrend, traders go short.
- Whenever the 34-period EMA is getting lower in value when compared to the 55-period EMA (oscillator is below zero), traders go short.
- When there is a bearish divergence between price and KVO, traders go short.
Note that many traders use the Klinger volume oscillator in combination with other tools like Stochastic Oscillator, parabolic SAR etc to eliminate false signals.
The figure below shows how to use KVO for buying and selling stocks.
Happy Trading!
Tara
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