Volume and Open Interest
period’s volume] and add this value to its running total. This running total repre-
sents the ADL. Notice that if (C − L) = (H − C), then:CLHC
2CHL
CHL/2−=−
=+
=+()
This means that when the current bar closes at its midpoint, no volume is
added or subtracted from the running ADL. The further up price closes from
the midpoint, the more volume is added to the running total. Similarly, the fur-
ther down price closes from the midpoint, the more volume is subtracted from
the running total, since the expression [(C − L) − (H − C)] turns negative. This
redresses the insensitivity of the OBV in responding to price behavior when
adding or subtracting volume. The ADL accounts for the current bar’s price ac-
tion when incorporating volume. It should be noted that no matter how wide
the range is for the current bar, the maximum volume added will always be the
day’s total volume, and not some multiple of it. This is clearly seen by replacing
the close price with the high in the expression [(C − L) − (H − C)]/(H − L) giving
[(H − L) − (H − H)]/(H − L) = 1. Hence the day’s total volume is the maximum
volume that can be added or subtracted from the cumulative ADL. In Figure
6.41, we observe the ADL indicating bullish confirmation, whereas the volume
bars are indicating bearish divergence. The volume bars are indicating an under-
lying weakness in the uptrend. The trader should wait for price confirmation of
a reversal before participating in the market.
In Figure 6.42, we observe that when the OBV and ADL are rising or falling
together, the price will trend in a decisive manner, and whenever the two oscil-
lators are moving in opposite directions, there is a tendency for price to rangefIgure 6.41 The ADL Oscillator Indicating Confirmation on the Hourly Chart of
EURUSD.
Source: MetaTrader 4