On Balance Volume (OBV) Back Test

by: Bill Zimmer Tuesday, July 6th, 2010 at 10:09 am

I was introduced to On Balance Volume or OBV about 40 years ago in a book by Joe Granville.  This indicator and Joe Granville being my introduction into technical analysis and Joe Granville has certainly made contributions to the field.

Last week I posted a piece on Trendlines on the Prudent Traders Accumulation Algorithm, speculating it may not be a bad way to go. Review that post Here! I received, over the weekend, a very nice email from a gentleman bringing up OBV with a 20-day moving average and wondering if that would not be better?

While we have been unable to program the trendlines in last weeks post and who knows we may never be able to program them, programming a back test of OBV is not that big of a deal. So lets do that today against two very liquid ETFs QQQQ and SPY.

Chart of QQQQ with OBV and 20-day EMA. The red and green arrows showing the buy and sell signals.

The back test is run from the beginning of the millenium through the end of June.  The arrows show a good deal of whipsaw which is apparent in the overall results 37% to 41% winners respectively.  However on the QQQQs a positive rate of return is received over the decade, while a negative rate of return is received on SPY.

Does this mean OBV is a bad indicator? Not necessarily. This back test is narrow in scope with only two ETFs and other interpretive possibilities have not been explored. Most likely however, OBV should be used as an indicator amongst several indicators you may utilize but probably not alone.