Constructing On-balance volume with smoothing and timeframe confirmation

What is being constructed

On-balance volume is a running total of volume whose sign follows the close. The archive then applies a Moving average to the daily series and compares daily and weekly versions of the same construction.

The object of the lesson is the slope of that line. The numeric level of the total is not treated as the thing to interpret.

Building the signed running total

The running total starts at the first period's volume, signed positive on an up close and negative on a down close.

Later values add the full current volume on a higher close, subtract it on a lower close, and leave the total unchanged on an unchanged close.

Smoothing the daily series

A nine-period simple moving average is applied to the daily series because the unsmoothed line is volatile and the smoothed slope is easier to read. The Moving average is a reading aid for that daily construction, not a replacement for the signed total.

Reading direction rather than level

The teaching rule treats the direction of the line, not its numeric level, as the object of interpretation.

A rising line during a mild price decline is presented as constructive, and a falling line during a short rally is presented as cautionary.

Chart sequences used in the lesson

One chart sequence shows the line making lower highs and lower lows through midsummer, then turning up while price is still falling before both later advance together.

A sideways price range with a double bottom in the volume line is treated as a more useful bullish setup on the second bounce than on the first.

Another sequence shows the volume line rolling over while price still prints one more high, then declining before a later sharp drop.

Daily and weekly confirmation

Comparing daily and weekly versions of the same construction is offered as a confirmation filter. Aligned slopes are treated as the stronger condition.

Editorial note: TradersWeek reads that comparison as Volume confirmation that should be in place before the smoothed line is treated as a trend hypothesis. That reading is editorial and is not attributed to the archive.