What Is On-Balance Volume (OBV)?
On-balance volume(OBV), creates a running total of positive and negative trading volume for a stock or security. One of the original momentum oscillators, OBV spawns from Joe Granville's theory that volume precedes price in an instructive, measurable fashion. The formula's calculation is simple, rising whenever volume on up days is greater than volume on down days and vice versa.
What Is the On-Balance Volume (OBV) Formula?
To measure a security's OBV, you need to understand the relationship of closing prices between two successful trading days. When the second day's price closes above the prior day's close:
OBV=PreviousOBV+Currenttradingvolume
If prices close lower on the second day:
OBV=PreviousOBV−Currenttradingvolume
Understanding On-Balance Volume (OBV)?
Despite being plotted on a price chart and measured numerically, the actual individual quantitative value of OBV is not relevant. The indicator itself is cumulative, while the time interval remains fixed by a dedicated starting point, meaning the real number value of OBV arbitrarily depends on the start date. Instead, traders and analysts look to the nature of OBV movements over time; the slope of the OBV line carries all of the weight of analysis.
Analysts look to volume numbers on the OBV to track large, institutional investors. They treat divergences between volume and price as a synonym of the relationship between "smart money" and the disparate masses, hoping to showcase opportunities for buying against incorrect prevailing trends. For example, institutional money may drive up the price of an asset, then sell after other investors jump on the bandwagon.
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FAQs
Description. On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. When the security closes higher than the previous close, all of the day's volume is considered up-volume.
How is OBV calculated? ›
Calculating On-Balance Volume
- If today's closing price is higher than yesterday's closing price, then: Current OBV = Previous OBV + today's volume.
- If today's closing price is lower than yesterday's closing price, then: Current OBV = Previous OBV - today's volume.
On-balance volume (OBV) is a form of technical analysis which enables traders to make predictions about future price movements based on the asset's previous trading volume. OBV is mostly used in shares trading, because the volume has an especially large influence on the way share prices move.
What is a high OBV? ›
A rising OBV reflects positive volume pressure that can lead to higher prices. Conversely, falling OBV reflects negative volume pressure that can foreshadow lower prices.
How do you analyze OBV? ›
The OBV trend confirmation strategy involves analyzing the relationship between the price of an asset and its OBV indicator over time. In an uptrend, the OBV indicator should generally be making higher highs and higher lows, indicating that the buying pressure behind the asset is increasing.
What is on-balance volume OBV? ›
On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days.
Is OBV a good indicator? ›
OBV oscillator is a good complement to both trend indicators of technical analysis and oscillators. If your strategy doesn't take volume readings into account, this tool can be a great addition to recognizing the price trend. Avoid using indicator signals on low-liquid assets and short timeframes.
What does trading volume tell you? ›
Trading volume, which measures the number of shares traded during a particular time period, can help. While swings in trading volume may not be enough on their own to reveal changes in a trend, they can give you a sense of how much strength there is behind a move.
What happens when stock volume increases? ›
It might be due to positive news or adverse developments. High volume means shares change hands often, showing market activity and how easy it is to buy or sell. More volume usually means more buyers and sellers. On a trading day, volume is often higher at the start and end when short-term traders act quickly.
Is High volume good or bad? ›
High Volume: Generally good stocks have high volume, which reduces liquidity risk. More people are trading these stocks indicate more people want them in their portfolio. An idea can be put forward is that more people believe that company is good, might be going through bad phase but still people are trading it.
Net volume is also similar to on balance volume, in that both technical indicators look at volume changes, but OBV adds up volume on up days and down days over time rather than looking at a single period. Other indicators, like the relative strength index, look at the magnitude of gains or losses to provide insights.
How to use the obv indicator for trading? ›
If the current closing price is more than the previous day's closing price, current OBV = previous OBV + currency pair's today volume, known as up volume. If the current closing price is less than the previous day's closing price, current OBV = previous OBV – today's volume, known as down volume.
What is OBV short for? ›
obviously: Obv they didn't know each other till today.
What is the description of OBV? ›
The OBV is the total volume, and it accounts for both positive and negative changes in an asset's trading volume. A simplified version of the OBV formula is as follows: If the closing price today is higher than it was yesterday, you'd add the current trading volume to the previous day's OBV to get the new OBV figure.
What is OBV percentage? ›
Description: On Balance Volume ("OBV") is a momentum indicator that relates volume to price change. On Balance Volume was developed by Joe Granville and originally presented in his book "New Strategy of Daily Stock Market Timing for Maximum Profits".
What is an example of OBV? ›
For example, if a stock's price continues to rise, but the on-balance volume indicator begins to decline, that may be interpreted that the previous buying momentum in the stock is beginning to wane. The stock price may soon peak and turn to the downside.
How is balance of trade calculated? ›
The balance of trade is typically measured as the difference between a country's exports and imports of goods. To calculate the balance of trade, you would subtract the value of a country's imports from the value of its exports.
Which is better OBV or accumulation distribution? ›
While the OBV and Accumulation/Distribution (A/D) indicators incorporate volume, there's a critical distinction. The OBV focuses solely on the closing price's relation to the previous closing price, whereas A/D also considers the day's trading range.
