OBV

Definition:

The On Balance Volume or OBV indicator was originally introduced in 1963 by Joe Granville in his book Granville’s New Key to Stock Market Profits. OBV was one of the first indicators to measure positive and negative volume flows in the stock market.

The indicator uses the relatively simple concept that volume precedes price. The indicator is calculated by adding the volume traded if the market closes up and subtracting the volume traded if the market closes down.

By totaling the additions and subtractions of volume, a single OBV line is formed which can then be compared to a price chart of the security to identify confirmations and divergences.

Sample Chart:

Usage:

The basic premise of the On Balance Volume indicator is that changes in the OBV will precede price changes. Rising volume in a depressed instrument will signal that the instrument has begun a phase of accumulation and the smart money is getting long.

Once additional interest comes into the market and begins buying, the price will most likely rise. Conversely, if the market has been rising for a period of time and an increase in volume ensues at the top of the price range, this means the smart money is selling and the price level has achieved a point of exhaustion. Public selling is usually not far behind.

The OBV indicator also offers directional information. A rising OBV indicates a bullish trend with heavier volume on up days, while a declining OBV indicates a downtrend with heavier volume on down days.

Nevertheless, if prices are rising while volume is declining, then a negative divergence is forming and the up-trend is in serious trouble and cannot be sustained. The same holds true if prices fall on contracting volume. The decline slowly exhausts the selling pressure and a divergence for an up-move starts forming.

Numerical values do not have great significant for this indicator. Instead, the direction of the trend is what to look out for with the OBV indicator, in addition to the relationship between the market price and the indicator’s overall direction.

Calculation Method:

Define:

• n= the number of the time period bar in question.
• Close(n)= The closing price at the end of time period n.
• Volume(n)= The volume traded during time period n.
• OBV(n)= The On Balance Volume Indicator value at time period n.

Calculate:

• If Close(n)>Close(n-1) =>OBV(n) = OBV(n-1) + Volume(n)
• If Close(n)>Close(n-1) =>OBV(n) = OBV(n-1) - Volume(n)
• If Close(n)=Close(n-1) =>OBV(n) = OBV(n-1)

Practice OBV Trading

Technical analysis with OBV is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!

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