The Klinger oscillator in trading is one of many technical indicators used to find buying and selling opportunities in financial markets.
The Klinger oscillator is unique in that it takes into account both price and volume data in its calculation. The theory behind the indicator is that strong price movements should be accompanied by strong volume and vice versa. When the oscillator is rising, it suggests that volume is increasing and the price trend is likely to continue. Conversely, when the oscillator is falling, it suggests that volume is decreasing and the price trend may be weakening.
The Klinger oscillator can be used in a variety of ways, including identifying divergences between the oscillator and the price chart, using it as a trend-following tool, and identifying overbought or oversold conditions. As with any technical indicator, it is important to use the Klinger oscillator in conjunction with other forms of analysis and risk management strategies to make informed trading decisions.
This indicator is used to determine the overbought and oversold levels of an asset, which can be useful in identifying trading opportunities.
Read on to learn more about what the Klinger oscillator is, how it is calculated, how it is interpreted, and more.
What is the Klinger Oscillator?
The Klinger oscillator was developed by Stephen Klinger to determine the long-term trend of money flow while remaining sensitive enough to detect short-term fluctuations. The indicator compares the volume flowing through a financial asset to the asset’s price movements, then converts the result into an oscillator that technical market analysts can easily interpret.
The Klinger oscillator shows the difference between two moving averages that are based on more than just price. Traders using this indicator usually watch for divergence in the indicator to signal possible price reversals. Like other oscillators, a signal line can be added to provide additional trading signals.
When applied on a chart, the Klinger oscillator typically looks like two lines and a horizontal center line.
The Klinger oscillator is quite complex to calculate, but it is based on the idea of volume force which explains the use of volume and trend (positive or negative) for its calculation. Using this data, the oscillator is created by looking at the difference between two exponential moving averages of volume force involving different time frames. The idea is to show how the volume flowing through an asset is affecting its price direction in the long and short term.
A signal line (13-period moving average) is used to trigger buy or sell signals. This technique is very similar to signals created with other indicators, such as Moving Average Convergence Divergence (MACD). While these are the basic signals generated by these indicators, it is important to note that these techniques can generate many trading signals that may not be as effective in sideways markets.
The Klinger oscillator also uses divergence to identify when price and volume are not confirming the direction of the move. It is a bullish sign when the value of the indicator is rising while the price of the financial asset continues to fall and vice versa for a bearish signal. Oftentimes, these readings can be more accurate than the actual crossovers in predicting upcoming reversals.
Traders will use tools like trend lines, moving averages, and other indicators to confirm the reversal. Additionally, traders can use the oscillator in conjunction with chart patterns such as price channels or triangles as a way to confirm a breakout or retracement.
Calculation of the indicator
The Klinger oscillator is calculated using two exponential moving averages (EMAs) of different lengths. One EMA is based on the asset’s price movements, while the other is based on the asset’s volume.
Here are the steps to calculate the Klinger oscillator:
The resulting oscillator is displayed as a line that oscillates above and below the zero line. When the Klinger oscillator crosses above the zero line, it is considered bullish, and when it crosses below the zero line, it is considered bearish. Traders often look for divergences between the Klinger oscillator and the price chart as a potential signal of a trend reversal.
It’s worth noting that the specific period lengths used to calculate the Klinger oscillator can be adjusted to fit the needs of individual traders and market conditions.
The Klinger oscillator is interpreted as a way to determine the trend, momentum, and volume of an asset. Traders use the oscillator to help identify potential buy or sell signals based on the following interpretations:
- Trend: When the Klinger oscillator is above the zero line, it is considered bullish and suggests that buying pressure is strong. When the oscillator is below the zero line, it is considered bearish and suggests that selling pressure is strong.
- Momentum: Changes in the direction of the Klinger oscillator can indicate shifts in momentum. For example, a sharp rise in the oscillator followed by a sudden drop may suggest that the momentum of the asset is slowing down.
- Divergence: Divergences between the Klinger oscillator and the price chart can be an indication of a potential trend reversal. If the oscillator is making higher highs while the price is making lower highs, this could suggest that the bullish trend is losing momentum and a bearish reversal may be imminent.
- Overbought/Oversold: Similar to other oscillators, traders can use the Klinger oscillator to identify overbought or oversold conditions. If the oscillator rises above a certain threshold, it may suggest that the asset is overbought and due for a correction. Conversely, if the oscillator drops below a certain threshold, it may suggest that the asset is oversold and due for a bounce.
The Klinger oscillator should be used in conjunction with other forms of analysis and risk management strategies to make informed trading decisions. As with any technical indicator, false signals can occur, so it’s essential to have a solid understanding of the underlying market conditions before making a trade based on the oscillator.
Klinger Oscillator Example
The following price chart shows us a way in which this indicator can help the trader to visualize multiple opportunities in the market, either buying or selling.
Drawbacks of the Klinger oscillator
The Klinger Oscillator is usually effective when the trend is in progress, however it is not so effective when we are trading against the trend and we try to adequately anticipate changes in its direction. To do this, it is recommended to use it in conjunction with other oscillators such as the Negative Volume Index (NVI) as a contrary oscillator, the Williams %R or the Relative Strength Index (RSI) to confirm overbought and oversold areas and the Moving Average. Convergence Divergence (or MACD), to confirm the validity of the current trend.