On Balance Volume (OBV)
What is it?
On Balance Volume (OBV) is a market strength indicator that was developed by Joe Granville to determine positive and negative volume flow for a given security by comparing volume to price movements. It is a simple indicator that adds a time-frame's volume when the closing price is up and subtracts the time-frame's volume when the closing price is down. The OBV line is a running cumulative total of this volume. The time-frame can be monthly, weekly, weekly, hour, 15 minutes, etc.
How is it calculated?
As already stated, OBV is calculated by adding the time-frame's volume to a running cumulative total when the security's closing price is up, and subtracting the volume from the running cumulative total when security's closing price is down.
If the closing price is higher than the previous closing price for the time-frame, then the new OBV is calculated using the formula:
OBV= current OBV + Volume
If the closing price is lower than previous closing price, then the new OBV is calculated using the formula:
OBV = current OBV - Volume
How is it used?
The direction of the OBV line is more important than the value of the OBV as the OBV line indicates buying or selling strength. A rising OBV indicates increased demand for a security, which is a requirement of a strong uptrend, and a rise in the security's price can be expected.
Conversely, divergence between the OBV and a rising security price suggests that the uptrend is weak and will not persist.
In a ranging market, a rising OBV indicates a potential bullish breakout while a falling OBV indicates a bearish breakout.
The following chart shows the OBV indicator in the lower chart panel on a 15-minute chart of the S&P500 Futures Index. If you look closely you would notice the divergence between the indicator and the price action towards the end of the chart. This was futures trading with no real volume following the Thanks Giving holiday.
on a 15 Minute S&P500 Futures chart
Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.
Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!