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On Balance Volume (or OBV), developed by Joe Granville, attempts to relate volume to price changes, and is a momentum indicator. Essentially a running total of volume, On Balance Volume shows if the volume of trade in a particular security is increasing or decreasing. If price closes higher than yesterday, the volume is 'up' volume; likewise, if it closes lower than yesterday, it is 'down' volume. It is generally believed that changes in the OBV precede price changes ('smart' money buying into a security means a rising OBV). When the general public joins in, both price and the OBV will leap up. Bull market tops can be indicated by price surging without a corresponding On Balance Volume increase, likewise bottoms by falls not matched by OBV declines. As a trend indicator, the On Balance Volume indicator follows Dow theory (an up trend is a succession of higher highs and higher lows, a down trend a succession of lower highs and lower lows). If the OBV reverses in trend, it may mean a price breakout is about to follow. Although a short term indicator, day trading systems tend not to rely on it because the data has a minimum granularity of 1 session. To calculate the On Balance Volume, add today's volume to a cumulative total when price closes up, and subtract today's volume when price closes down. If the close is unchanged, the OBV is yesterday's OBV. |
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