Developed by Joseph Granville, the On Balance Volume (OBV) is a momentum indicator that relates volume to price change.
This indicator keeps a running total of volume flowing into or out of a security. When the security closes higher than the previous close, all of the day's volume is considered up-volume. A close lower than the previous day's results in all of the day's volume considered down-volume. A rising OBV is defined as a sign of smart money flowing into a security. As the public then moves into the security, both the security and the OBV will surge ahead.
If price movement precedes OBV movement, Granville calls this a "non-confirmation." Non-confirmations can occur at bull market tops, when the security rises before/without the OBV or at bear market bottoms when the security falls before/without the OBV.
When the security's price closes up, the day's OBV is created by adding the day's volume to the cumulative total. Subtract the day's volume from the cumulative total when the price closes down.
Look for rising trends (when each new peak is higher than the previous peak and each new trough is higher than the previous trough) or falling trends (when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough) to signal a "breakout." OBV breakouts normally precede price breakouts and investors should buy long on OBV upside breakouts and sell short when on OBV downside breakouts. If OBV moves sideways, it is in a doubtful trend and this implies a hold until the trend changes.
It is the trend of the OBV line that is important and not the actual numbers themselves as actual values will differ depending on the period and the start date.
Calculation:
PrevPrice = The previous price
PrevOBV = The previous value of the indicator
Inputs:
Price Field = Close
Indicates Open, High, Low or Closing price.
Indicator Type: Momentum, Market Strength