On Balance Volume

Introduction to On Balance Volume Technical Indicator

The On Balance Volume Technical Indicator (OBV) is a momentum indicator that shows the relationship between volume and price change. It was developed by Joseph Granville. When the security closes higher than the previous close, it is considered up-volume, and when it closes lower, it is considered down-volume.

The Assumption and Theory Behind OBV Analysis

The basic assumption of On Balance Volume analysis is that OBV changes precede price changes. If OBV rises, it indicates smart money flowing into the security. When the public follows and invests in the security, both the security and the OBV will increase. Non-confirmations can occur when the security moves without corresponding OBV movements.

Identifying Trends and Trend Breakouts

In a rising trend, each new peak and trough of OBV is higher than the previous ones. In a falling trend, each new peak and trough is lower. When OBV is moving sideways without successive highs and lows, it is in a doubtful trend. A trend remains in force until it is broken, which can occur when it changes from rising to falling, or vice versa. A doubtful trend that lasts for more than three days also breaks the trend.

Using OBV Breakouts for Trading Decisions

When OBV changes to a rising or falling trend, it indicates a breakout. Since OBV breakouts typically precede price breakouts, investors should consider buying long on OBV upside breakouts and selling short on downside breakouts. Positions should be held until the trend changes.