On-balance volume

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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.[2]

The formula

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

Application

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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.[3] 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.[4]

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.[2] 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.[2]

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

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Other price × volume indicators:

See also

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  • Dimensional analysis — explains why volume and price are multiplied (not divided) in such indicators

References

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  1. ^ "What is the On-Balance Volume indicator and how to use it on Tuned?". Tuned. 2022-01-30. Retrieved 2024-03-17.
  2. ^ a b c Joseph E. Granville, Granville's New Strategy of Daily Stock Market Timing for Maximum Profit, Prentice-Hall, Inc., 1976. ISBN 0-13-363432-9
  3. ^ On Balance Volume ( OBV ). 22 September 2007.
  4. ^ OBV Behavioral Limitations and Formulas at Financial-edu.com.
  5. ^ What Does On-Balance Volume Mean
  6. ^ StockCharts.com article on On Balance Volume
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