OBV versus the Accumulation Distribution Line

On Balance Volume (OBV) and the Accumulation Distribution Line are indicators that combine price and volume. Both start with price by forming a multiplier for volume. OBV is simple. The volume multiplier is +1 when the close is above the prior close and -1 when the close is below the prior close. This means total volume is subtracted on a down day and added on an up day.

The Accumulation Distribution Line is a bit more complicated, but still pretty easy to understand. The volume multiplier also ranges from -1 to +1. The multiplier is positive when the close is above the mid point of the high-low range and negative when below the mid point. +1 indicates a close on the high. -1 indicates a close on the low. 0 indicates a close at the mid point of the high-low range. More often than not, the volume multiplier is a fraction, such as .60, -.75, .33 or -.25. These means only a portion of volume is added or subtracted each period. Full volume levels are used when the close is on the high (+1) or the low (-1)

On Balance Volume (OBV) and the Accumulation Distribution Line use these volume multipliers to create a cumulative plot that can be compared to the underlying security. The current period's value is added to the prior value. Assume for simplicity that daily indicator readings are +10, -5, +5, +10 and -5. The cumulative plot would start with +10 and add -5 for a two day cumulative of +5. The third day is +5 so this cumulative total would rise to +10 (+5 plus +5 = +10). The cumulative plot would rise to +20 on day 4 (+10 plus +10) and fall to +15 on day 5 (+20 plus -5).

So which is better? One is not better than the other. Because of the formula differences, these two can be used together to confirm one another. On the chart below, notice how both broke trendline resistance around the same time as Apple broke trendline resistance. These indicator breakouts confirm the breakout in the stock. Also notice that OBV formed a bullish divergence ahead of the late August low. Both indicators hit new highs recently and show no signs of weakness. You can read more about On Balance Volume and the Accumulation Distribution Line in our ChartSchool.

Click this image for a live chart

Valuable information, Arthur. I've found another price/volume indicator worth considering is the recently added Force index from Elder. With longer term parameters it can show meaningful divergences for larger moves, for instance Force(65) with a MA13 superimposed. On a six month chart you can see meaningful divergences at May vs July 2010 price lows on SPDR ETFs XLE, XLB, XLI and others. Within XLE, see COP, HES, APC, APA and others for similar cases. But sometimes Force(65) only moves with price ('confirming', I suppose), such as XOM, CVX. Here are a couple where the divergence has not played out yet (if it will) XLF, RRC, COG. Thanks for these posts and always great charts.

Posted by: Mark Dobbins October 22, 2010 at 19:12 PM

I agree that each indicator has its own valid purpose. To conserve chart real estate, I like to stack OBV, the Accum/Dist, and the Volume indicators together. I put Volume Below the price chart, then OBV and Accum/Dist "Behind Ind" behind the volume indicator. Use the Color, the Height and the Opacity settings to keep each indicator distinct. This way, in one frame, I get a good feel about the volume effect as compared to the price in the chart.

Posted by: Tim Farrar October 23, 2010 at 07:04 AM

Its about time you wrote a book on using the computer to evaluate investments . I think it might be well received .

Posted by: james c. johnson October 23, 2010 at 13:48 PM

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