On Balance Volume (OBV) uses volume to confirm price movements. The calculation for On Balance Volume is given below
- On days when the close is greater than the open (i.e. stock posted a gain) then the volume for that day is added to the running OBV total.
- However, when the close is less than the open (i.e. stock posted a loss), then the volume for that day is subtracted from the running OBV total.
Generally speaking, increases in volume when prices rise is bullish. Therefore an increasing OBV is bullish. When volume increases and prices decrease this is bearish: A decreasing OBV is generally considered bearish. As a confirmation tool, if price and the OBV indicator are rising together, this is bullish. When prices and the OBV are moving downward, this is considered bearish.
When prices move higher or lower on low volume, the On Balance Volume technical analysis indicator will hardly move. This can signal weak participation by traders and is called a divergence. The price movement was not confirmed by volume and therefore is looked upon by traders as a questionable move in which they are unlikely to join in.
Volume is one of the most important parts of technical analysis, arguably second only to price. To learn how to interpret volume click the Volume Analysis link.
Trading is risky. Trade only with money you can afford to lose. Past performance of technical analysis indicators is not indicative of future performance.