V.6:4 (142-144): OVR - a new indicator by Fred Purifoy

V.6:4 (142-144): OVR - a new indicator by Fred Purifoy
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OVR - a new indicator by Fred Purifoy

On-balance volume (OBV) has two generally recognized goals: to serve as a filter for trending and non-trending markets, and to anticipate reversals by divergence from the price trend. (OBV, recall, is the cumulative sum of volume where volume is added on up days and subtracted on down days.)

However, coupling price and volume may not be the only path. If we accept that vertical (or bar) chart action is a function of volume and open interest (i.e., the activity of the market's participants), there should be an indicator that would reflect that relationship. My attempt at defining such an indicator, using only volume and open interest, is the on-balance volume reflex (OVR). To be useful it should serve the same purposes as OBV, but do it better.

To calculate OVR follow these rules:

-If open interest for a given day, t, is greater than that for day t-c, then add the day's volume to the cumulative total. ("c" can be set at any number of days. I use c=4 but there is room for experimenting with this value).

-If open interest for day t is less than that for day t-c, then subtract the day's volume from the cumulative total.

-The value of the total is the indicator's value for day t.

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