On-balance volume
(OBV) is a technical analysis indicator intended to relate
price and volume in the stock market. OBV is based on a
cumulative total volume. Volume on an up day (close higher
than previous close) is added and volume on a down day is
subtracted.
The starting point for an OBV total, i.e.. the zero point, is
arbitrary. Only the shape of the resulting indicator is used,
not the actual level of the total.
The technique was investigated in the 1940s by Woods and
Vignolia and presented in a course by them in 1946. They
called it "cumulative volume". Joseph Granville gave it the
name "on-balance volume" and popularized the technique in his
1963 book Granville's New Key to Stock Market Profits. It can
be applied to stocks individually based upon their daily up or
down close, or the market as a whole using breadth of market
data, i.e. the advance/decline ratio.
OBV is generally used to confirm price moves. The idea is that
volume is higher on days where the price move is in the
dominant direction, for example in a strong uptrend more
volume on up days than down days.
So when prices are going up, OBV should be going up too, and
when prices make a new rally high, OBV should too. If OBV
fails to go past its previous rally high then this is a
negative divergence, suggesting a weak move. |
