Volume Indicator: On Balance Volume (OBV)
On Balance Volume (OBV) is an indicator of market forces developed by Joe Granville to determine the flow of positive and negative volumes for a given pair by comparing volumes with price movements. This is a simple indicator by adding a certain time-frame volume when the closing price rises and decreases the specified time-frame volume when the closing price falls. The OBV line is the cumulative sum that flows from this volume. Time-frames can be monthly, weekly, weekly, hour, 15 minutes, etc.
As described, the OBV is calculated by adding the time-frame volume to the cumulative number that runs when the pair’s closing price rises, and subtracts the volume from the cumulative number that runs as the pair’s closing price falls.
If the closing price is higher than the previous closing price for the time frame, the new OBV is calculated using the formula:
OBV = Current OBV + Volume
If the closing price is lower than the previous closing price for the time-frame in question, the new OBV is calculated using the formula:
OBV = Current OBV – Volume
The direction of the OBV line is more important than the OBV value because the OBV line indicates buying or selling power. A rising OBV indicates an increase in demand for an underlying pair, which is a need for a strong uptrend, and a pair price increase can be expected.
Conversely, the divergence between OBV and the rise in security prices suggests that the uptrend is beginning to weaken and will not last.
In sideways markets, an increased OBV indicates a potential bullish breakout while a falling OBV indicates a potential bearish breakout.