Technical indicator
On Balance Volume (OBV)
On Balance Volume (OBV), introduced by Joseph Granville, is a running total of volume that shows whether money is flowing into or out of a security.
What OBV shows
The idea behind OBV is that volume precedes price: when money flows into a security, a rise in price tends to follow, and when it is being sold, a decline tends to follow. When OBV is in an uptrend the stock is being bought (accumulated); when it is in a downtrend the stock is being sold.
OBV is in an uptrend when each new high is higher than the previous high and each new low is higher than the previous low. It is in a downtrend when each new high is lower than the previous high and each new low is lower than the previous low.
Calculation
where Vt is the volume and Ct the close on day t. OBV starts at zero on the first data point; the absolute value depends on the start date, so only its direction matters.
Trading signals
- Buy on a confirmed change of OBV from a downtrend to an uptrend – a long-term buy signal.
- Sell on a confirmed change from an uptrend to a downtrend.
- Divergence: rising OBV while the price is flat or falling suggests accumulation ahead of a rise.
See also Accumulation/Distribution, a refinement that weights volume by the position of the close within the day’s range.
Technical indicators describe past prices and do not guarantee future results. Combine several indicators and test a strategy on historical data before trading it. See our disclaimer.