OBV (On balance volume)
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On balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in the price of a stock. Joseph Granville pioneered the OBV metric in the 1963 book Granville's New Key to Stock Market Profits.
Granville believed that volume was the key force behind the markets and designed OBV to predict when major movements in the markets would occur based on changes in volume. In his book, he described the predictions made by OBV as “a spring being wound tightly”. He believed that when volume rises sharply without significantly changing the price of a stock, the price will eventually jump up or fall down.
Traders use the indicator to predict price movements or when they want to confirm price trends. The calculation is based on the discrepancy between price and volume.
Bullish divergence - when price declines and OBV rises at the same time, you can expect an upward movement. Accordingly, in a bullish divergence, the price will display lower lows, and the indicator - higher lows.
Bearish Divergence is defined when the price continues to rise while the OBV indicator is declining. When price makes higher highs and on-balance volume has lower highs, it is a sign of bearish divergence.
Trend Confirmation - to confirm the direction of the trend, see if the OBV line is moving in the same direction as the price. If on-balance volume increases with a price increase, you can confirm the uptrend and volume moves to support the price rise.
Potential breakout or breakdown from the ranging market - during ranging market conditions, you should watch closely for increases or decreases in on-board volume indicator values as this could signal a potential price breakout or fall. The rising OBV line can warn of a potential breakout to the upside because accumulation is taking place.
Where:
OBV = Current on-balance volume level;
OBV prev = Previous on-balance volume level;
Volume = Latest trading volume amount.
Period – number of periods involved in the indicator calculation, 1 by default.
The indicator looks as follows on the chart:
