On Balance Volume (OBV) is a technical indicator that detects momentum, the calculation of which concerns volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. On Balance Volume was developed and designed by Joe Granville and introduced in his book Granville’s New Key to Stock Market Profits in 1963. This was one of the first indicators that measure positive and negative volume flow. Chartists may search for divergences between OBV and price to predict price movements or they may use OBV to confirm price trends.
OBV attempts to detect when a financial instrument is being accumulated by a large number of buyers or sold by many sellers. Investors could use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend.
The On Balance Volume line is just a running total of positive and negative volume. A period’s volume is positive when the close is over the prior close. A period’s volume is negative when the close is under the prior close.
If the closing price is above the prior close price then:
Current OBV = Previous OBV + Current Volume
If the closing price is below the prior close price then:
Current OBV = Previous OBV – Current Volume
If the closing prices equals the prior close price then:
Current OBV = Previous OBV (no change)