On-balance volume (OBV) is a
technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
indicator intended to relate price and volume in the
stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
. OBV is based on a cumulative total volume.
The formula
:
Because OBV is a cumulative result, the value of OBV depends upon the starting point of the calculation.
Application
Total
volume
Volume is a measure of occupied three-dimensional space. It is often quantified numerically using SI derived units (such as the cubic metre and litre) or by various imperial or US customary units (such as the gallon, quart, cubic inch). The de ...
for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value. So, when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too. If OBV fails to go past its previous rally high, then this is a negative
divergence
In vector calculus, divergence is a vector operator that operates on a vector field, producing a scalar field giving the quantity of the vector field's source at each point. More technically, the divergence represents the volume density of the ...
, suggesting a weak move.
The technique, originally called "continuous volume" by Woods and Vignola, was later named "on-balance volume" by
Joseph Granville who popularized the technique in his 1963 book ''Granville's New Key to Stock Market Profits''.
[Joseph E. Granville, ''Granville's New Strategy of Daily Stock Market Timing for Maximum Profit'', Prentice-Hall, Inc., 1976. ] The index can be applied to stocks individually based upon their daily up or down close, or to the market as a whole, using breadth of market data, i.e. the advance/decline ratio.
OBV is generally used to confirm price moves. The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend there is more volume on up days than down days.
StockCharts.com article on On Balance Volume
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Similar indicators
Other price × volume indicators:
* Money flow
The money flow index (MFI) is an oscillator that ranges from 0 to 100. It is used to show the ''money flow'' (an approximation of the dollar value of a day's trading) over several days.
The steps to calculate the money flow index over N days
St ...
* Price and volume trend
* Accumulation/distribution index
See also
* Dimensional analysis
In engineering and science, dimensional analysis is the analysis of the relationships between different physical quantities by identifying their base quantities (such as length, mass, time, and electric current) and units of measure (such as m ...
— explains why volume and price are multiplied (not divided) in such indicators
References
{{technical analysis
Technical indicators
External links
Investopedia Definition, On-Balance Volume Indicator
Tuned, Using The On-Balance Volume Indicator Programmatically