On-balance volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price. It measures the buying or selling pressure. The idea is that volume precedes price, hence, when volume increases sharply without a significant change in the stock’s price, the price will eventually jump upward, and vice versa.
OBV rises when volume on up days exceeds volume on down days.
OBV can be used to either confirm a price trend or indicate a price reversal.
Trend confirmation. When OBV and price trends are in sync (same direction), then OBV simply confirms the price trend.
Divergences indicate potential reversals. The absolute value of OBV is not important, instead, the trend in OBV vs. trend in price are important to watch. If they divert, it’s a signal. Bullish divergence forms when OBV is rising while the price is flat or declining. This would suggest that the price should begin rising. Bearish divergence forms when OBV is declining while the price is flat or rising.
- The OBV is a running total of volume (positive and negative). Calculation steps:
- If today’s closing price is higher than yesterday’s closing price, then: Current OBV = Previous OBV + today’s volume
- If today’s closing price is lower than yesterday’s closing price, then: Current OBV = Previous OBV – today’s volume
- If today’s closing price equals yesterday’s closing price, then: Current OBV = Previous OBV