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.

Chart Example

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.


OBV on the S&P500
OBV on a 15 Minute S&P500 Futures chart


Wealth Warning

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!


Market Strength

OBV
Market Strength

The market strength can refer to the broader market as in an All Share Index, or it can refer to the probable strength of a particular trend of a given stock or commodity. When it is used to refer to the broader market index, the number of advancing and declining stocks in a market are taken into consideration. When it is used to refer to a particular stock or commodity, volume or open interest is taken into consideration.

The popular Market Strength indicators for individual stocks and commodities include On Balance Volume (OBV), Accumulation/Distribution, ...


Related Indicators:

Accumulation/Distribution (A/D)

<A/D
Accumulation/Distribution

Accumulation/Distribution (A/D) is a leading market strength indicator developed by Larry Williams. It compares the open, close, high and low of a security to determine whether the volume should be considered positive or negative for that period.

For A/D, volume is considered bullish when the price close is higher than the open and bearish when the price close is lower than the open. However, the amount of volume assigned to the indicator is dependent on the distance between the open and the close, and distance between ...