On-balance volume explained

On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market.[1] OBV is based on a cumulative total volume.

The formula

OBV=OBVprev+\left\{\begin{matrix} volume&ifclose>closeprev\\ 0&ifclose=closeprev\\ -volume&ifclose<closeprev\end{matrix}\right.

Because OBV is a cumulative result, the value of OBV depends upon the starting point of the calculation.

Application

Total volume for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value.[2] So, when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too. If OBV fails to go past its previous rally high, then this is a negative divergence, suggesting a weak move.[3]

The technique, originally called "continuous volume" by Woods and Vignola, was later named "on-balance volume" by Joseph Granville who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits.[4] The index can be applied to stocks individually based upon their daily up or down close, or to the market as a whole, using breadth of market data, i.e. the advance/decline ratio.

OBV is generally used to confirm price moves.[5] The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend there is more volume on up days than down days.[6]

Similar indicators

Other price × volume indicators:

See also

External links

Notes and References

  1. Web site: 2022-01-30 . What is the On-Balance Volume indicator and how to use it on Tuned? . 2024-03-17 . Tuned . en-US.
  2. http://www.oxfordfutures.com/futures-education/tech/on-balance-volume.htm On Balance Volume (OBV)
  3. http://financial-edu.com/on-balance-volume-obv.php OBV Behavioral Limitations and Formulas
  4. Joseph E. Granville, Granville's New Strategy of Daily Stock Market Timing for Maximum Profit, Prentice-Hall, Inc., 1976.
  5. http://www.investopedia.com/terms/o/onbalancevolume.asp What Does On-Balance Volume Mean
  6. http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_obv StockCharts.com article on On Balance Volume