On balance volume (OBV) is a technical analysis indicator that tracks trading volume to predict changes in price momentum. The OBV was defined by Joseph Granville in 1963, and it builds on basic economic theories of supply and demand.

In economics, when demand for an item exceeds supply, the price of that item will rise. The reverse is true if demand for the item shrinks. In securities trading, demand is measured by trading volume, and the OBV compares trading volume from period to period. When there is an increase in volume, we can expect a corresponding increase in price. If trading volume decreases, we can expect the price to drop.

On Balance Volume Indicator Chart Example

How is On Balance Volume Calculated?

The OBV is a comparison, so each calculation depends on events during the period of measurement. If the trading volume at the end of the current period is greater than at the end of the last period, add the current period volume to the last period volume. If the current period closes lower than the prior period, subtract the current from the prior.

For example, if we measure a daily OBV, we begin with yesterday’s close, say 800,000. If today’s volume is higher, say 850,000, we add the two together for an OBV of 1,650,000 for the day. Alternatively, if today’s volume were 600,000 we subtract that number from 800,000 for an OBV of 200,000. If today’s volume and yesterday’s are equal, the OBV stays equal as well, in this case 800,000.

How to Use On Balance Volume to Make Better Trading Decisions

As with other forms of technical analysis, graphing OBV over time can reveal a significant amount about price trends. In general, an upward sloping OBV line indicates rising prices, while a downward trend shows dropping prices. Traders can get more meaningful information by marking lines of support and resistance within these graphs.

On Balance Volume Indicator Trending Up With Price

Support and resistance are graphed by marking a trend line through the lowest OBV values (support) and the highest OBV values (resistance) over a given period. As with price trends, the OBV tends to stay within a given range over a period – the points between which the market is comfortable and supply and demand reach a sort of stasis. Changes in the market environment can lead to changes in this comfort range, what are known as “breakthroughs,” and breakthroughs often precede changes in price trends

Since trading volume changes precede price changes in most cases, when the OBV breaks through support or resistance lines a similar breakthrough in price support or resistance is extremely likely. Traders can use this information as a strategy indicator, employing bearish strategies when the OBV breaks through a support line, and going bullish when it pushes through resistance.

On Balance Volume Indicator Break Of Support

It’s important to note that while trend changes within the OBV are fairly reliable indicators of price movement, the time between the OBV change and the price change can vary greatly. A single breakthrough doesn’t always indicate a complete reversal of trend. As with other Technical Indicators, the OBV is best taken in context with other analysis and market environments as a whole.