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
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.