On Balance Volume relates volume to price change. It is calculated by adding the day's volume to a cumulative total when the security's price closes up, and subtracting the day's volume when the security's price closes down.
Steps in the On Balance Volume (OBV) calculation are as follows:
- If Close for the period is higher than the previous Close:
OBV = OBV [previous period] + Volume [current period] - If Close for the period is lower than the previous Close:
OBV = OBV [previous period] - Volume [current period] - If Close for the period is equal to the previous Close:
OBV = OBV [previous period]
It requires about 40 data points before a meaningful signal can be generated.
How to use:
If the market is currently trending then the indicator can be used to confirm the continuation of the trend or alert to a potential change in trend. Divergence between price and the indicator can be used to signal a potential change in trend. That is, if the OBV is rising while price is falling then the move is unlikely to continue. Conversely, if the OBV is falling while price is rising, the up move is likely to fail.
