On Balance Volume (OBV)

Type

Volume/Momentum Indicator – compares closing price and volume

History

The On Balance Volume (OBV) indicator was developed by Joseph Granville and is explained in his book “New Strategy of Daily Stock Market Timing for Maximum Profit”.

How does it work?

OBV shows whether volume is 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. When the security closes lower than the previous close, all of the day's volume is considered down-volume.

The basic assumption, regarding OBV analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV. When the public moves into the security, both the security and the OBV will surge ahead.

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.

Likewise, the OBV 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.

When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend.

Trading Signals

During a ranging market watch for a rising or falling On Balance Volume:1.      Rising OBV warns of an upward breakout

2.      Falling OBV warns of a downward breakout

During a trending market watch for a rising or falling On Balance Volume:1.      Bullish divergence between OBV and price warns of market bottoms

2.      Bearish divergence between OBV and price warns of market topsSettings

Sharechart Default:  14 period

Example

The chart below is GRD, notice that the share price rises in sync with the On Balance Volume indicator.

The setting for the On Balance Volume for the graph above was 13 periods. It can be modified: go to Settings > Indicators > On Balance Volume.