A technical indicator that measures the cumulative positive and negative volume flow in and out of a trading instrument.
Overview
The On Balance Volume (OBV) indicator was popularized by Joseph Granville’s 1963 book, “Granville’s New Key to Stock Market Profits”. It was one of the first indicators to measure the cumulative positive and negative volume flow (accumulation/distribution) in and out of a trading instrument.
Calculation
The OBV is calculated by adding the current period’s volume to a cumulative OBV total when the trading instrument’s price closes up and by subtracting the current period’s volume from the cumulative OBV total when the trading instrument’s price closes down.
On Balance Volume on the Daily GBP/USD Chart on 4/4/2011
Source: VT Trader
Interpretation
The OBV indicator is generally used to confirm price moves. The concept behind OBV is quite simple: volume precedes price. However, the actual numerical value (volume) of OBV is not important, but the direction of the OBV trend is. Looking for divergences between the OBV and price can prove to be very effective in identifying potential reversal and/or trend continuation points in price movement. There are several types of divergences:
Classic Divergence (aka: Regular Divergence)
* Bullish Divergence = Lower lows in price and higher lows in the OBV
* Bearish Divergence = Higher highs in price and lower highs in the OBV
Hidden Divergence (aka: Reverse, Continuation, Trend Divergence)
* Bullish Divergence = Lower lows in OBV and higher lows in price
* Bearish Divergence = Higher highs in OBV and lower highs in price
