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. What is a common strategy traders implement when using On-Balance Volume (OBV)?

    Read about common trading strategies that are implemented based off of signals generated from the On-Balance Volume momentum ... Read Answer >>
  2. Why is On-Balance Volume (OBV) important for traders and analysts?

    Discover reasons why the on-balance volume momentum indicator has become one of the most widely used and trusted tools of ... Read Answer >>
  3. How do I use On-Balance Volume (OBV) to create a forex trading strategy?

    Read about some of the basic ways On-Balance Volume indicators can be used by forex traders to measure volume trends and ... Read Answer >>
  4. What is the On-Balance Volume (OBV) formula and how is it calculated?

    Read about the formula and calculation for On Balance Volume, or OBV, which is a technical indicator that shows movements ... Read Answer >>
  5. What are the best technical indicators to complement On-Balance Volume (OBV)?

    Discover why it is important to confirm the price trend signals generated from the on-balance volume indicator and which ... Read Answer >>
  6. What are the main differences and similarities between Money Flow Index & On Balance ...

    Understand the basics of On Balance Volume and the Money Flow Index, including their similarities and differences in terms ... Read Answer >>
Related Articles
  1. Trading

    On-Balance Volume: The Way To Smart Money

    This momentum indicator was designed to predict when major market moves would occur.
  2. Trading

    How On-Balance Volume Reveals Market Players' Strategy

    On-Balance Volume (OBV) reveals the intent of market players, often before price action generates a buy or sell signal.
  3. Trading

    How To Use Volume To Improve Your Trading

    Volume is a simple yet powerful way for traders and investors to increase their profits and minimize risks.
  4. Trading

    Interpreting Volume For The Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.
  5. Trading

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  6. Trading

    Confirming Price Movements With Volume Oscillators

    Use this indicator to validate a change in price direction and moving averages.
  7. Trading

    How To Read The Market's Psychological State

    Discover what on-balance volume, accumulation/distribution and open interest can tell you about the market mood.
  8. Investing

    What The Market Open Tells You

    The first few moments of trading provide a lot of information. If a trader analyzes this information, it can give a lot of insight into the market's moves for the day.
  9. Trading

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
RELATED TERMS
  1. Accumulation/Distribution

    An indicator that tracks the relationship between volume and ...
  2. Accumulation/Distribution

    A momentum indicator that attempts to gauge supply and demand ...
  3. Low Volume Pullback

    A technical correction toward an area of support that occurs ...
  4. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  5. Up Volume

    A stock volume that closes at a price higher than the previous ...
  6. Cumulative Volume Index - CVI

    A momentum indicator that gauges the movement of funds into and ...
COMPANIES IN THIS ARTICLE
Trading Center