On-Balance Volume (OBV) Indicator

The on-balance volume (OBV) indicator compares a security’s volume to price over a specific period of time with the result based on a cumulative total volume. The resulting data enables technical traders to more accurately determine when a security is being heavily bought or sold and it confirms the price movements of an analyzed stock.

The on-balance volume indicator is one of the easiest technical indicators to read. In essence, when the day’s close results in a higher volume, the OBV is positive and when the day closes with a lower volume, the value of the OBV is negative. If the on-balance volume indicator fails to exceed its previous rally high, the result is a negative divergence.

Calculating the On-Balance Volume

A stock’s on-balance volume is calculated by assigning a positive or negative value on the total volume for a specific trading period. Whether the value is positive or negative is determined by whether the price of the security is up or down during the period. When the price point is up, the volume is considered positive and when the security’s price is down, it is given a negative value.

The positive or negative volumes for the entire period are then compiled and added to a total that is accumulated from the start of the measure.

The most important aspect of the on-balance volume technical analysis is not the actual value of the OBV but rather the trend the on-balance volume is signifying.

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