You should never trade based on trend indicators alone. The volume oscillator (VO) is another indicator that will help you determine whether the trend is breaking support or resistance. In essence, the old saying is true: without volume there is no movement of price, and without movement of price there is no movement. Use that old saying to your advantage.
Several oscillators such as the Percent Volume Oscillator (PVO) and the Market Volume Oscillator (MVO) are VO-based.
The VO calculation is based on two moving volume averages (VMA). The basis of the calculation is simple:
VO = [Fast VMA] / [Slow VMA]
A fast MMA is a short-term moving average, and a slow MMA is a long-term moving average.
If we use the VO set (5, 20) as an example, the setting would be Fast MMA at 5 bar and Slow MMA at 20 bar. At 5 bars, the Fast MMA is a shorter period, and at 20 bars the Slow MMA is a longer period.
In essence, the VO calculates the difference between the 2 MMAs. This calculation reveals an increase in volume and possible abnormal volume activity. VO tells us where the current volume is relative to the average volume over a long period of time.
If we look at the above VO setting, it means that when the VO is greater than 1 then the Fast MMA is above the Slow MVA and we can conclude that the volume of activity in the market is higher than usual. In other words, we can conclude that there is an unusual increase in volume based on the parameters we set (5.20).
Knowing how the basis of calculation works in VO, the indicator becomes a very effective tool in your trading. You should never rely solely on trend-based technical indicators. That way you will only see half of the overall picture and this will lead to more losses than wins. When you combine your trend indicators with an oscillator such as VO, you will be able to distinguish whether the changes in the trend are based on abnormal volume activity and make a better decision whether to enter the trade.
The final thought is that panic sales should consider discontinuing support combined with unusual sales volume, and the opposite is true with breaking resistance with an unusual increase in volume that should be considered greedy buying.