V.8:1 (40-43): Increasing OBV reliability with stock index futures by Gerald Appel

Increasing OBV reliability with stock index futures by Gerald Appel

Traders have used volume pattern recognition techniques in an attempt to forecast price movement probably for as long as records regarding trading volume have been maintained.

As a general rule, a market is considered bullish when it rises on increasing volume and declines on decreasing volume, and bearish when it advances on lighter volume and declines on heavier volume. Unfortunately, such rules are somewhat simplistic and subject to many exceptions. For example, a situation where volume is diminishing as markets are advancing is not necessarily followed immediately by downside reversal, although diminishing volume during advances does often provide notice of diminishing buying pressure — a reliable enough concept, if not exactly precise in its timing and application.

Many attempts have been made over the years to codify trading rules based on volume, though few have been successful. One of the best known is Joseph E. Granville's on-balance volume (OBV) technique.