What's the difference between on-balance volume (OBV) and accumulation/distribution?

By Casey Murphy AAA
A:

On-balance volume and the accumulation/distribution line are similar in that they are both momentum indicators that use volume to predict the movement of “smart money”. Given the variation in the underlying formulas, this is where the similarities end. In the case of on-balance volume, it is calculated by summing the volume on an up-day and subtracting the volume on a down-day. As you can see from the chart below, when prices of an underlying asset are rising on high volume, then the on-balance volume indicator would spike, signaling to other traders that a significant move is underway. Given the state of the Twitter Inc (TWTR) chart below, traders would predict that a move higher is in the cards.

The underlying formula used to create the accumulation/distribution (Acc/Dist) line is quite different than the OBV shown above. The formula for the Acc/Dist, without getting too complicated, is that it uses the position of the current price relative to its recent trading range and multiplies it by the period's volume. As you can see from the chart below, in some cases the pattern may be quite similar to other indicators such as the OBV.

The calculation of the Acc/Dist suggests that if the price is trading near the higher of the range that the indicator will be trading near its peak. This would be used by traders to suggest that the smart money is moving into the shares. The biggest difference between the indicators is that if the bulk of the volume came on a selloff, yet the price closes the period at a high, the Acc/Dist would suggest that traders are piling in while the OBV would suggest the opposite. (For more, check out Which Direction Is The Market Heading?)

RELATED FAQS

  1. How do I use a Turtle Channel to create a forex trading strategy?

    Learn two simple forex trading strategies, one trend trading strategy and one swing trading strategy, that can be implemented ...
  2. How do I implement a forex strategy when spotting a Tri-Star Pattern?

    Learn about the tri-star pattern and how to use this reversal signal in conjunction with other technical indicators to create ...
  3. How do I build a profitable strategy when spotting an Tri-Star pattern?

    Learn how to use corroborating evidence from technical indicators such as volume to create a profitable trade strategy based ...
  4. What are the best technical indicators to complement the Ultimate Oscillator?

    Learn about the technical indicators traders use to complement trading with the Ultimate Oscillator indicator, including ...
RELATED TERMS
  1. Indicator

    Indicators are statistics used to measure current conditions ...
  2. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  3. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  6. Negative Volume Index - NVI

    A technical indicator that relies on changes in a security’s ...

You May Also Like

COMPANIES IN THIS ARTICLE
Related Articles
  1. Trading Strategies

    Trading Volatile Stocks with Technical ...

  2. Investing

    Use The Percentage Price Oscillator: ...

  3. Technical Indicators

    The Four Most Commonly-Used Indicators ...

  4. Insurance

    Exploring Oscillators and Indicators

  5. Markets

    Profitability Indicator Ratios

Trading Center