On Balance Volume

Indicator On Balance Volume (OBV) was first proposed in 1963 by Joe Granville in his book "New Key to Stock Market Profits" for use in commodities markets. The author of the indicator believed that the volume is the main component of the market, and with its help it is possible to predict the likely course of the price in the near future.

The essence of the indicator is to track the ratio of trading volume and price reaction to this volume. The formula for calculating the indicator is quite simple. If each new closing price is higher than the previous one, the volume is added to the previous indicator. If the closing price is lower, it is subtracted. Then it remains to compare the indicator readings with the price chart to find divergences or confirming signals.

To further understand the indicator, just calculate it using the formula:

OBV i = OBV i-1 + Volume i

That is, if today's closing price (or the closing price of the current bar) is higher than yesterday's closing price, the current OBV is equal to the sum of the previous OBV and the volume on the current bar.

OBV i = OBV i-1 - Volume i

Using OBV

The indicator itself does not give clear signals for entering the market. It is supposed to be used to confirm the signals of other indicators. The OBV task find confirmation of the shift trend or to confirm the trend. These are the only purposes of the indicator.

It is assumed that before a bearish trend reverses into a bullish one, large market participants begin to buy the asset, so that volume begins to increase on the lows. The opposite happens at the highs (see Fig. 1).

For trend confirmations The line on the OBV is used, which points in the direction of the price trend. Its breakdown signals an impending change. Therefore, the trader should observe if the OBV trend coincides with the price trend or if there is a divergence.

Fig. 1. Breakdown of the OBV line signals the forthcoming change of trend.