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The MVO is based on the PVO (Percentage Volume Oscillator) and Stochastics, one of the most popular volume and price technical studies. The combining of the power of 2 different indicators into one, provides the ability to analyze price and volume at the same time.

The PVO measures the relationship between 2 volume moving averages (VMAs) by revealing the volume surges (abnormal volume activity) that may lead to a trend reversal. It is commonly known that big volume surges are generated in the result of greedy buying or panic selling. The bigger the volume surge is during the price move up, the more greedy buying is taking place, and the bigger the volume surge is during the price move down, the more extreme panic selling we see. As a rule in the majority of cases, the heavy greedy buying and extreme panic selling may lead to a shift the in the support and demand, changes in the market mood and trend redirection.

We call the shorter-term VMA the "fast VMA"; the longer-term VMA is called the "slow VMA". The PVO less than zero tells us that the Fast VMA is below Slow VMA which reveals that at the analyzed point the volume is below the average volume over the longer period of time and there is no volume surges (no greedy buying or panic selling). The positive PVO indicates that Fast VMA is above the Slow VMA and we see that volume at analyzed point is bigger than the average volume over a longer period of time. The bigger the positive PVO value is, the bigger volume surge we see and we may say the positive PVO describes the level of the panic selling and greedy buying. This indicator could be used to predict changes in the market trend.

The PVO is calculated:

PVO = ([Fast VMA] - [Slow VMA]) / [Slow VMA] * 100%
or
PVO = ([Fast VMA] - [Slow VMA]) / [Slow VMA]

The problem with PVO is that PVO value is not connected with the price and the PVO itself does not tell us at what market stage the volume surge occurs. In order to know how to interpret the PVO and the volume surge, we need to know at what market stage this volume surge was generated - during the price move up or during the price move down. Yes, when PVO is plotted on the chart we may visually evaluate the market direction, take a look at other technical indicators and tell what the analyzed volume surge represent. However, again, the PVO value itself does not tell anything more than the level of the volume surge (level of greedy buying or panic selling).

It becomes obvious that in order to mathematically evaluate the PVO it has to be joined with price technical indicators that reveal the price direction or stage. For this purpose we used Stochastics. Stochastics compare an equitys current close to its high/low range over a set number of periods:

Raw Stochastics = 100 * (Recent Close - Low(n)) / (High(n) - Low(n));

Basically, the PVO reveals how big the current volume surge (Fast VMA) is in relation to the average volume over the longer period of time (Slow VMA) and Stochastics show how far the current close is from the high and low in the analyzed period. Combining PVO with price indicator allows traders to more clearly see at what stage of the trend and what trend direction the volume surge appears, and accordingly enhance or attenuate it and ignore normal volume fluctuations. By using PVO and Stochastics we may tell how close to the most recent highs and lows the volume surge occurs and accordingly evaluate it as either panic selling or greedy buying.

MVO is calculated in several stages:

• On the first stage, the negative PVO is assigned to zero:

  IF PVO is less the zero then PVO is equal to zero.

  It tells that if the current volume is lower than the average volume over the longer period of time, then this volume is ignored (PVO becomes zero) and only volume surges (when fast VMA is bigger than slow VMA) are taken into consideration in the MVO calculation.
  
  We may say that the periods when MVO equals zero tell us that there are no volume surges (no abnormal volume activity) during this periods.
   
• The next step is Stochastics oscillator calculation. We applied the following formula to modify the Stochastics into the oscillator:

  Stochastics Oscillator = (Stochastics Slow - 50) / 50

  In this form the Stochastics has absolute values in the range from minus 1 to plus 1 or it could be considered from minus 100% to plus 100%. It transforms Stochastics values into the range of the PVO values which allows performing mathematical operation between these two indicators.

  In this way the negative Stochastics Oscillator shows that the recent close is closer to the low in the analyzed period and positive Stochastics Oscillator shows that the recent close is closer to the high in the analyzed period. The closer the recent close is to the high or low, the closer the Stochastics Oscillator moves to plus 1 or minus 1 and the closer the recent close is to the middle between high and low then the closer the Stochastics Oscillator moves to zero.
   

• In the last step the PVO is multiplied by the Stochastics Oscillator:

  MVO = PVO * Stochastics Oscillator

Chart 1: MVO (Market Volume Oscillator)

In summary: MVO reveals the magnitude of the volume surges in relation to the trend direction, and accordingly enhances or attenuates it and ignores normal volume fluctuations.