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?)

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