CumulativeSum (Open Interest * (Close – Close.1) / (True High – True Low)) + OBV
Let’s break this down into units. The first measure is perhaps the most important, CumulativeSum. It means we will add or subtract a value each day to an ongoing line or indicator. This is not an oscillator. This is a continual flowing line of accumulation and distribution within the market.
The formula is calculating the cumulative sum of open interest times the net change in price, divided by the true range. We then add the OBV value to this cumulative sum.
So we first take the net change in price (today’s close minus yesterday’s close) to get a percentage of where within the range the close was. Not all of the activity will be buying or selling; the market “tells” us what percentage of open interest goes to the buy or sell side.
Not only that, it also means we are incorporating price and trend change into the formula.
What we have accomplished with the formula is to continue to use trend, the direction of the close-to-close change from yesterday. However, we are still unwilling to use all of the open interest on that day. Instead we arrived at a percentage of the range, which is then our multiplier for open interest. In the old OBV technique, both days would have assigned the total volume for the day.
The next step in the formula is to then add this value, a combination of price change and open interest into the original OBV formula. This final step combines price, open interest and volume all into one accumulation/distribution line, giving the indicator the full name of Williams POIV AD.
While POIV presents a very different view of accumulation and distribution it is used in the same fashion. In basic terms, look for divergences (“POIV times two,” above) shows two examples of this new tool, borne from the stock market, but applied to commodities. In the futures markets, volume is not what it once was. These examples indicate that open interest is indeed a better overall measure, at least for commodities.
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