On-Balance Volume (OBV)

What is On-Balance Volume (OBV)?

On-balance volume (OBV) is a technical trading momentum indicator that utilizes volume flow to predict changes in stock price. Joseph Granville previously developed the OBV metric in the 1963 book Granville's New Key to Stock Market Profits.

Granville accepted that volume was the key force behind markets and planned OBV to project when major moves in the markets would happen in view of volume changes. In his book, he depicted the predictions created by OBV as "a spring being twisted firmly." He accepted that when volume increases forcefully without a massive change in the stock's price, the price will eventually hop up or fall downward.

The Formula For OBV Is

$\begin &\text = \text$ + \begin \text{volume,} & \text > \text \ \text{0,} & \text = \text \ -\text{volume,} & \text < \text \ \end \ &\textbf \ &\text = \text \ &\text_ = \text \ &\text = \text \ \end

Working out OBV

On-balance volume gives a running total of an asset's trading volume and shows whether this volume is flowing in or out of a given security or currency pair. The OBV is a cumulative total of volume (positive and negative). There are three rules executed while working out the OBV. They are:

1. On the off chance that the present closing price is higher than the previous closing price: Current OBV = Previous OBV + the present volume

2. In the event that the present closing price is lower than the previous closing price: Current OBV = Previous OBV - the present volume

3. On the off chance that the present closing price equals the previous closing price: Current OBV = Previous OBV

What Does On-Balance Volume Tell You?

The theory behind OBV depends on the distinction between smart money - specifically, institutional investors - and less sophisticated retail investors. As mutual funds and pension funds start to buy into an issue that retail investors are selling, volume might increase even as the price remains relatively level. Eventually, volume drives the price up. By then, larger investors start to sell, and more modest investors start buying.

In spite of being plotted on a price chart and measured mathematically, the genuine individual quantitative value of OBV isn't important. The indicator itself is cumulative, while the time interval stays fixed by a dedicated starting point, meaning the real number value of OBV randomly relies upon the beginning date. All things being equal, traders and analysts focus on the idea of OBV movements over the long run; the incline of the OBV line conveys all of the weight of analysis.

Analysts focus on volume numbers on the OBV to follow large, institutional investors. They treat divergences among volume and price as a synonym of the relationship between "smart money" and the dissimilar masses, expecting to showcase opportunities for buying against inaccurate winning trends. For instance, institutional money might drive up the price of an asset, then, at that point, sell after different investors get on board with that fleeting trend.

Illustration Of How To Use On-Balance Volume

The following is a rundown of 10 days' worth of a speculative stock's closing price and volume:

1. The very beginning: closing price equals $10, volume equals 25,200 shares
2. Day two: closing price equals $10.15, volume equals 30,000 shares
3. Day three: closing price equals $10.17, volume equals 25,600 shares
4. Day four: closing price equals $10.13, volume equals 32,000 shares
5. Day five: closing price equals $10.11, volume equals 23,000 shares
6. Day six: closing price equals $10.15, volume equals 40,000 shares
7. Day seven: closing price equals $10.20, volume equals 36,000 shares
8. Day eight: closing price equals $10.20, volume equals 20,500 shares
9. Day nine: closing price equals $10.22, volume equals 23,000 shares
10. Day 10: closing price equals $10.21, volume equals 27,500 shares

As should be visible, days two, three, six, seven and nine are up days, so these trading volumes are added to the OBV. Days four, five and 10 are down days, so these trading volumes are deducted from the OBV. On day eight, no changes are made to the OBV since the closing price didn't change. Given the days, the OBV for every one of the 10 days is:

1. The very first moment OBV = 0
2. Day two OBV = 0 + 30,000 = 30,000
3. Day three OBV = 30,000 + 25,600 = 55,600
4. Day four OBV = 55,600 - 32,000 = 23,600
5. Day five OBV = 23,600 - 23,000 = 600
6. Day six OBV = 600 + 40,000 = 40,600
7. Day seven OBV = 40,600 + 36,000 = 76,600
8. Day eight OBV = 76,600
9. Day nine OBV = 76,600 + 23,000 = 99,600
10. Day 10 OBV = 99,600 - 27,500 = 72,100

The Difference Between OBV And Accumulation/Distribution

On-balance volume and the accumulation/distribution line are comparable in that they are both momentum indicators that utilization volume to predict the movement of "smart money". In any case, this is where the similitudes end. On account of on-balance volume, it is calculated by adding the volume on an up-day and deducting the volume on a down-day.

The formula used to make the accumulation/distribution (Acc/Dist) line is very not quite the same as the OBV displayed previously. The formula for the Acc/Dist, without getting too confounded, is that it utilizes the position of the current price relative to its recent trading reach and duplicates it by that period's volume.

Limitations Of OBV

One limitation of OBV is that it is a leading indicator, implying that it might create predictions, however there is little it can say regarding what has really occurred in terms of the signs it produces. Along these lines, creating false signals is prone. It can consequently be balanced by lagging indicators. Add a moving typical line to the OBV to search for OBV line breakouts; you can confirm a breakout in the price in the event that the OBV indicator makes a concurrent breakout.

One more note of caution in utilizing the OBV is that a large spike in volume on a single day can lose the indicator for a really long time. For example, a surprise earnings announcement, being added or taken out from an index, or gigantic institutional block trades can make the indicator spike or fall, however the spike in volume may not be indicative of a trend.

Features

• On-balance volume (OBV) is a technical indicator of momentum, utilizing volume changes to make price predictions.
• OBV shows crowd sentiment that can predict a bullish or bearish outcome.
• Looking at relative action between price bars and OBV creates more actionable signs than the green or red volume histograms commonly found at the lower part of price charts.