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On Balance Volume - OBV

On Balance Volume indicator (OBV) was developed as a technical indicator by Joseph Granville. It represents correlation between volume and changes in a price. If the close is higher than the previous one, then the volume is added to the previous value of the indicator.  However, if the close is lower than the previous one, the volume is subtracted from the previous OBV value.

OBV indicator moves slightly faster than the price changes. An increasing on-balance volume shows that professionals are investing funds in the market.  When retail investors are buying both indicator value and price change.

If the price leading the indicator, it is considered a non-conformation. Situation like that may be observed when the price rises faster than on-balance volume changes or if it falls before the indicator gets contracted. It usually defines the bottom for the bear market or the ceiling of the bull market.

A gradual rise of peaks and drops of the OBV indicator reveals an upward trend; in case they go down — downward trend is indicated.  When the indicator is moving sideways, a trend is not defined.

If a trend was defined, it follows its direction until the next pivot point comes. An uptrend may be replaced with a downtrend and vice versa. In this case, reversal changes the trend to a doubtful one for three periods. If the doubtful trend persists for two periods only, no changes may be considered.

The change of trend is usually followed with a break. This signals that a price change is about to occur. Broken resistance signals to buy, a break of support level—to sell. It is recommended keeping positions open until the trend gets changed.

Calculation

If today's close is greater than yesterday's close then: OBV(i) = OBV(i-1)+VOLUME(i)
If today's close is less than yesterday's close then: OBV(i) = OBV(i-1)-VOLUME(i)
If today's close is equal to yesterday's close then: OBV(i) = OBV(i-1)
where
OBV(i) is the indicator value of the current period;
OBV(i-1) is the indicator value of the previous period;
VOLUME(i) is the volume of the current bar.

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