Constructing the obvm signal line

From accumulator to two lines

The modified volume indicator is built by taking classic on-balance volume, applying an exponential average to that series, then applying a second exponential average to the result to form a signal line.

On-balance volume is a running volume accumulator that adds volume on up closes and subtracts it on down closes. It is used here as the raw series that later averages act on.

Exponential smoothing is a recursive average that weights recent observations more heavily than older ones. It is applied first to the volume accumulator, then again to produce a signal line. The series after the first average is obvm, plotted as the fast line of the two-line indicator.

A moving average is a lookback average of an ordered series. In this construction the second average of the already-smoothed volume line becomes the crossover reference. That second, typically longer exponential average is the signal line, used as the reference for cross-over and cross-under events.

Why the averages are nested

Because raw on-balance volume is described as highly jagged, the first exponential average exists specifically to tame that series before a second average is used for crossover rules.

A common default construction uses a 7-period average for the smoothed volume line and a 10-period average for the signal line. Those lengths are exposed as chart inputs so they can be changed.

How the two-line plot is meant to be read

The two-line plot is intended to mark possible entries and exits when the smoothed volume line crosses above or below the signal line, and also to help locate divergences.

A crossover hypothesis treats the fast line moving through the signal line as a testable entry or exit condition rather than as a standalone forecast.

The shape and direction of the smoothed volume line can matter more than the numerical level of that line, including when the line remains below zero.

Study form and next-bar form

The same construction was coded as both a plotted study and a simple market-on-next-bar strategy that buys on a cross above the signal line and sells short on a cross below it.

How to judge the extra layer

Editorial: judge this construction by whether the extra smoothing layer makes entries and divergences easier to state as a crossover hypothesis. Do not judge it by whether any platform backtest looks attractive.