On Balance Volume

On Balance Volume Technical Indicator (OBV)

The On Balance Volume Technical Indicator (OBV) is a momentum technical indicator that relates volume to price change. It was developed by Joseph Granville. The indicator is simple: if the close price of the current bar is higher than that of the previous bar, the volume of the current bar is added to the previous OBV. If the current bar close price is lower than the previous one, the current volume is subtracted from the previous OBV.

The Basic Assumption

The basic assumption of On Balance Volume analysis is that OBV changes precede price changes. This theory suggests that when OBV rises, it indicates smart money flowing into the security. Subsequently, when the public moves into the security, both the security and the On Balance Volume will increase. Non-confirmations can occur at bull market tops or bear market bottoms, indicating a lack of synchronization between the security’s price movement and the OBV movement.

Trends and Breakouts

The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Conversely, the On Balance Volume is in a falling trend when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough. A doubtful trend occurs when the OBV is moving sideways without making successive highs and lows. A trend remains in force until it is broken.

Breaking the Trend

There are two ways in which the On Balance Volume trend can be broken. The first is when the trend changes from rising to falling or vice versa. The second way is if the trend changes to a doubtful trend and remains doubtful for more than three days. In the case of a rising trend changing to a doubtful trend for only two days before reverting back to a rising trend, the On Balance Volume is considered to have always been in a rising trend.

Breakouts and Trading Strategy

When the OBV changes to a rising or falling trend, a breakout occurs. These OBV breakouts typically precede price breakouts. Therefore, investors are advised to buy long on On Balance Volume upside breakouts and sell short on downside breakouts. Positions should be held until the trend changes.