Research
Volume Zone Oscillator

Updated: 2013/04/22

Volume Zone Oscillator is discussed by Waleed Aly Khalil in The International Federation of Technical Analysts Journal 09.

Download Article:
IFTA09VZO.pdf IFTA09VZO.pdf
Size : 1950.819 Kb
Type : pdf

The Amibroker AFL code can be downloaded here.
Some knowledge of Amibroker is needed to use this.

Download AFL:
CS_VZO.afl CS_VZO.afl
Size : 1.695 Kb
Type : afl

The Swordfish indicator code can be found here.

Swordfish Indicator:

Using Amibroker and the ALSI data provided on this site Support, I ran some back tests to determine the viability of trading a very simple system based on the Volume Zone Oscillator (VZO).  The AFL can also be added as an indicator to an Amibroker chart.

Use the 5 or 30 minute periodicity continuous data available here, or any of the EOD data, keeping in mind that volume data is required. The AFL is set to Futures Mode and you will need to change that to back test using share data.  
The 5 and 30 minute back tests were done using data from 1 January 2010 up to and including 31 March 2013. To save processing time the optimizations were only done with 30 minute data, but the AFL can be used on any periodicity. Initial capital is set to R 100,000, margin is at R 20,000 and only 1 ALSI contract is traded throughout the back test. No allowances for trade commissions or other costs are included.

Trading Tactic 1 - Back Test

In this case the most basic  Volume Zone Oscillator  trading tactic was used: Trading Tactic 1:

  • Go short if the VZO crosses +40 (VHigh) from above.

  • Go long if the VZO crosses -40 (VLow) from below.

  • Traded as an always-in system, alternating long and short and staying in the market overnight.

  • Do not use profit or loss stops.

30 Minute Periodicity Results - Back Test

Year
2010
2011
2012
2013 Q1

Profit
R -1,420
R -35,860
R 31,280
R 16,640

Maximum Drawdown
R -59,080
R -67,830
R -26,660
R -37,000

Winning Percentage
59.38%
55.81%
57.45%
67.65%

5 Minute Periodicity Results - Back Test

Year
2010
2011
2012
2013 Q1

Profit
R -80,670
R -80,410
R -8,320
R -4,990

Maximum Drawdown
R -88,200
R -84,070
R -39,370
R -30,440

Winning %
59.05%
60.11%
59.92%
62.65%

Trading Tactic 1 - Optimization 

The results for the standard Volume Zone Oscillator  tactic are dismal. An optimization follows to see if improvements to the parameters can be made.  All the optimization code is in the Amibroker AFL, please run your own optimization before deciding on a set of parameters to use.
The results below are only a summary of what can be achieved.  The best performing set of parameters are shown rated by either the highest net profit or the best CAR/MDD (Compound Annual Return / Maximum System Drawdown).  Also included is a third option set to consider.

VZO Parameters:

MAp
MApV
VLow
VHigh

EMA period used by the VZO calculation.
MA period used when calculation the MA of the VZO.
The Buy level, -40 in Trading Tactic 1 (Value is negative)
The Sell level, +40 in Trading Tactic 1

30 Minute Periodicity Results - Optimization


Best CAR/MDD
Best Net Profit
3rd Option

Profit
R 254,370
R 267,120
R 255,530

CAR/MDD
2.42
1.76
1.76

Maximum DD
R -30,410
R -49,820
R -47,840

Win % (Total)
87.50% (32)
70.19% (104)
80.00% (50)

MAp
18
8
14

VLow (-)
60
80
70

VHigh
70
80
70

As you can see the system performance using the 30 minute periodicity can be so significantly improved that the system becomes viable for use. The maximum drawdowns are still large and further testing is needed for better risk control.  The low number of trades is a good feature.

Trading Tactic 2 - Optimization 

For the second test a Moving Average of the VZO was used instead of the actual VZO, all other options remain static. The AFL includes Buy/Sell options for both tactics as well as profit and loss stop options.

30 Minute Periodicity Results - Optimization


Best CAR/MDD
Best Net Profit

Profit
R 275,060
R 296,980

CAR/MDD
2.66
1.48

Maximum DD
 R -33,150
R -59,090

Win %
75.00%
58.24%

MAp
16
13

MApV
10
6

VLow (-)
40
20

VLow (-)
30
10

There are many other options for using the Volume Zone Oscillator.  Experiment with the provided AFL and Swordfish indicator to find a system that suits your trading profile.  Back test results may not be repeatable in live trading, always test your trading tactic thoroughly before committing trading capital.