Technical Indicators: On-Balance Volume
On Balance Volume (OBV) is a very simple statistic that can often be very helpful when trying to determine if whether or not volume movements have been favorable or unfavorable. it was created by Joseph Granville in the 70s and has since become one of the more popular technical indicators used by today’s investors. It works very simply. There is a running total kept of all the volume figures from day to day closes. If the price closes up, then the volume of that day is added to the running total. If the price closes down, then the volume of that day’s trading is subtracted from the running total.
Above you see a graph of Volume+ and a graph of On-balance Volume along with a price chart. As we have said many times, true trends (up and down) are supported by high volume. This is an indication that a lot of people in the market feel the same way about the stock. Thus, when you see a downtrend, OBV ought to decrease as well. The slope of the decrease is a sign of how strong the trend is (the more vertical the stronger). When you see an uptrend, OBV ought to rise as well with a more steep slope being a better confirmation of good momentum. Often times, OBV will signal to you that a trend is beginning to lose steam as it will begin to flatten out before the price follows suit.
Words of caution for OBV are the same as those for many indicators. OBV is not meant to be used on its own and you should always use several indicators to ensure that you are doing accurate analysis. That being said, it is not necessary to use a dozen indicator as many are formulated using the same underlying data. In the case of OBV, you would not use a graph like Volume+ to confirm your analysis since the two charts are based on volume closes and thus will always confirm each other. Instead, mix OBV with a price based chart like MACD or RSI as well as an upper indicator like Bollinger Bands or Price Channel to give you a good broad look at the way a stock is trading.
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