Technical Analysis, Studies, Indicators:
On Balance Volume (OBV)
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On Balance Volume (OBV) is one of the
first volume indicators in the technical analysis. Introduced by Joe
Granville in 1963 it become one of the first most used technical
indicators to analyze positive and negative volume flow.
As with all volume indicators the principle "Volume Moves Markets" is in
the core of the OBV indicators. By understanding that there is no price
movement without volume and that there is no volume without price
change, the technical analysis already in the middle of the 20th century
realized the importance of the volume analysis.
The OBV calculations are simple. The On Balance Volume is cumulative
total of the negative and positive volume, where the negative volume is
volume during the price decline and positive volume is volume during the
price advance.
When the current bar close is higher than the previous bar close (price
rises), then the OBV formula is:
OBV =
previous bar OBV + current bar Volume
When the current bar close is below the
previous bar close (price declines), then the OBV is calculated as:
OBV =
previous bar OBV - current bar Volume
In a situation when the current bar close is
the same as previous bar close then the OBV stays unchanged:
OBV =
Yesterday's OBV
The On Balance Volume could be used as
confirmation indicator as well as a tool to predict coming trend reversal.
If the OBV line moves up along with the price MA (Moving Average) technical
analysis tells that the OBV confirms the up-trend. At the same time the OBV
decline during the price drop would confirm a down-trend. The divergence of the
SBV movement and price trend could be used to anticipate possible changes in the
market trend. The declining OBV during the price advance may indicate possible
beginning of a new down-trend, while advancing OBV during the price decline
could indicate a possibility of begging a new up-trend.
The same as with other volume based indicators the OBV provides best result when
it is applied to analyze indexes (Nasdaq 100,
S&P 500, DJI, NYSE
and other)
Chart 1:
Nasdaq 100 index - On Balance Volume (OBV).
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