On-balance volume

On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.^[1]

The formula

$OBV = OBV_{prev} + \left\{ \begin{matrix} volume & \mathrm{if}\ close > close_{prev} \\ 0 & \mathrm{if}\ close = close_{prev} \\ -volume & \mathrm{if}\ close < close_{prev} \end{matrix} \right.$

Application

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.^[2] 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.^[3]

The technique, originally called "cumulative volume" by Woods and Vignolia, was later named in 1946, "on-balance volume" by Joseph Granville who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits^[1]. 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.^[1]

OBV is generally used to confirm price moves.^[4] The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend more volume on up days than down days.^[5]

Similar indicators

Other Price × Volume indicators:

• Money Flow
• Price and Volume Trend
• Accumulation/distribution index

See also

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

References

1. ^ ^{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
2. ^ On Balance Volume ( OBV ). 22 September 2007.
3. ^ OBV Behaviorial Limitations and Formulas at Financial-edu.com.
4. ^ What Does On-Balance Volume Mean
5. ^ StockCharts.com article on On Balance Volume