On-Balance Volume OBV
On-Balance Volume (OBV) Indicator Purpose
On-Balance Volume (OBV) is a volume-based indicator proposed by Joe Granville. He introduced this tool in his book “Granville's New Key to Stock Market Profits”, 1963. OBV as a cumulative indicator measures buying and selling forces. Also it is one of the first indicators that measure positive and negative volume flow. OBV merges price and volume to decide whether the price movements are strong or weak. The volume is usually interpreted as:
- Increasing/decreasing price accompanied by growing volume, confirms the price trend.
- Increasing/decreasing price accompanied by falling volume, shows that the price movement is weak
On-Balance Volume (OBV) Indicator Usage
On Balance Volume (OBV) line is used for trend confirmation or possible turning points identification purposes.
The trend is confirmed:
- If the line is rising, an uptrend in prices is confirmed
- If the line is falling a downtrend in prices is confirmed.
The divergence pattern analysis:
- Rising OBV with the falling prices indicates the downtrend may be weakening to a bullish reversal;
- Falling OBV with rising prices indicates the uptrend may be weakening to a bearish reversal.
On Balance Volume (OBV) Indicator Calculation
On Balance Volume (OBV) calculation method is very simple, and which is given below:
- On an up day, the volume is included to the previous day's OBV
- On a down day, the volume is deducted from the previous day's OBV.
OBV(t) = OBV(t-1) + Vol, if C(t) > C(t-1);
OBV(t) = OBV(t-1) – Vol, if C(t) < C(t-1);
OBV(t) = OBV(t-1), if C(t) = C(t-1),
t – current period;
t-1 – previous period;
C – close price;
Vol. – volume.