Osi Volume Balance Oscillator
The Osi Volume Balance Oscillator is another, optionally, adaptive oscillator. It is independent of price, and based only on volume, the theory being that volume precedes price. As it is not a derivative of price, its action can only be read as another look at what price is likely to do. It cannot be classified as either a lagging or leading indicator, but its action does suggest that it may be a good precursor of price action, based as the indicator is on volume. It is largely based on the net volume over the measuring period, turned into an oscillator.
Unlike for most oscillators, where the best period is usually half the dominant period, for the Osi Volume Balance Oscillator, the best period is usually going to be the dominant period. The calculation period can be set to be half the dominant period; the dominant period, or a fixed period specified by the user. In its adaptive mode, by limiting the calculation to a ratio of the most recent period, the Osi Volume Balance Oscillator is analyzing only the most recent relevant action, timed to depend on the dominant period of the price action. The effect is to dynamically adjust the period over which the analysis is being performed, so ignoring the action of the distant past, but analyzing the most recent past that is relevant to the current action. As an oscillator, it can also be used as an overbought/oversold indicator. The thresholds are user specified in the parameters. Like many oscillators, the Osi Volume Balance Oscillator can be used as a divergence oscillator to try to catch turns, though trend followers tend to use it in the opposite manner, looking to at as a continuing indicator.
Typical Usage Scenarios
Aggressive traders: Usually buy as it exits the oversold area, and sell as it exits the overbought area.
Conservative traders: Usually buy on a cross above zero from below, and exit either when it goes overbought, or when it exits the overbought area. Conversely, they sell on a cross below zero from above, and exit either when it goes oversold, or when it exits the oversold area.
Trend followers: Tend to enter as conservative traders, but often exit only when they use some other means to determine that the trend has ended. Sometimes trend traders actually buy only when the Osi Volume Balance Oscillator enters and stays in the overbought area or sell short on entry to (and stay in) the oversold area, the theory being that that is when a trend is confirmed.
When used as a divergence oscillator, the Osi Volume Balance Oscillator is used like all other oscillators to determine if its action confirms the price action, and then used as a lead to reversal or continuation.