Although on balance volume, OBV, does a good job, it does have its shortcomings. First, it assigns a value to the whole day's volume, which may not be quite fair if the close was up only by a couple of ticks. Secondly, is it right to assign a negative value to a day that has spent most of the time on the upside and closed only slightly lower? Our stock trader can resolve these situations using one of the variations of the OBV to discover the true upside or downside volume.

One variation our stock trader or option trader can use is giving greater weight to days where the trend is strongest. On an up day, our trader multiplies the volume by the amount of price gain for that day. He is still assigning positive (+) or negative (-) values, but it will give greater weight to days with a greater price movement, and reduce the impact of days where the price changes were minimal.

There are other more sophisticated formulas. For instance, our trader can use James Sibbet's Demand Index, which combines price and volume into a leading market indicator, or the Herrick Payoff Index, which uses open interest to measure money flow.

Volume reporting is more useful in the stock market than in futures. Unlike futures volume, which is reported a day late, stock market volume is reported immediately. Levels of upside and downside volume are available for stocks and not for futures. A more advanced indicator known as Money Flow was developed by Laszlo Birinyi, Jr. This real time version of OBV utilizes the available volume data on each price change of the day to track the level of volume to see if money is flowing in or out of a stock. Money Flow is rather sophisticated, requires a lot of computer power, and isn't readily available to most traders.

All the OBV variations serve the same purpose of determining if the heavier volume is on the bullish upside or bearish downside. Simple as it is, the OBV line does a very good job tracking the volume flow in both the stock and futures markets. Also, OBV is readily available on most charting software.

Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.