On Balance Volume (OBV)

On Balance Volume

On Balance Volume is a momentum indicator. It predicts changes in the price of an asset by using volume flow.

This indicator is cumulative and all of the weight of analysis is placed on the slope of the OBV line. Joseph Granville thought that whenever volume increased sharply without a corresponding change in the price of a stock, there was likely to be a corresponding drop or rise in price shortly thereafter.

OBV provides traders with a running total of the asset’s trading volume. In this way, it gives an indication of crowd sentiment. If you notice that the volume is increasing rapidly, that means a lot of traders are jumping into the market. There must be a strong pull in either direction shortly after you observe that rising interest.

Calculation of On Balance Volume

The method of calculating On Balance Volume will vary according to the closing price.

The following formulae are used to calculate On Balance Volume :

If today’s close is greater than yesterday’s close then: OBV(i) = OBV(i1)+VOLUME(i) If today’s close is less than yesterday’s close then: OBV(i) = OBV(i-1)- VOLUME(i) If today’s close is equal to yesterday’s close then: OBV(i) = OBV(i-1)

These symbols are used in the On Balance Volume formula::

OBV(i) – is the indicator value of the current period;

OBV(i-1) – is the indicator value of the previous period;

VOLUME(i) – is the volume of the current bar.