On balance Volume

This indicator was developed by Joe Granville and aims to measure buying and selling pressure, and hence to confirm price trends and identify when a divergence may occur. Granville believed that a change in volume would lead to a change in price, rather than some theorists who believe that the price change will lead to the volume change, hence if one analyses the volume movements they can predict future price trends. The indicator does this by looking at the movements in volume - adding volume on up days and subtracting on down day. As a result it analyses positive and negative movements in volume.

Calculation

The indicator is shown as a line peaking and dipping as volume increases and decreases.


If Today’s Close Price > Yesterday’s Close Price, the calculation will be:
= Previous day’s OBV + Current Volume

If Today’s Close Price < Yesterday’s Close Price, it will be:
= Previous day’s OBV – Current Volume

If Today’s Close Price = Yesterday’s Close Price, it will be:
= Previous day’s OBV

Signals

  • A decreasing OBV means that interest in the instrument in declining and hence falling prices are expected, this is the time to sell
  • An increasing OBV means that interest in the instrument in increasing and hence higher prices are expected, this is the time to buy.
  • Where prices are decreasing but OBV increases this suggest a bullish divergence to come and hence time to buy
  • Where prices are increasing but OBV decreases this suggest a bearish divergence to come and hence time to sell