On Balance Volume (OBV)
On Balance Volume (OBV) is a momentum indicator that relates volume to price change.
Contents
Formula
The formula of OBV is pretty simple. If the current close price is higher than the previous close, the volume of the current bar is added to the previous OBV. If the current close price is lower than the previous one, the current volume is subtracted from the previous OBV. If the current close price is equal to the previous one, the OBV value in the current period is equal to the previous OBV. Mathematically, this can be written as follows:
<math> OBV_{i} = OBV_{i-1} + \left\{ \begin{matrix} Volume_{i} & \mathrm{if}\ close_{i} > close_{i-1} \\ 0 & \mathrm{if}\ close_{i} = close_{i-1} \\ -Volume_{i} & \mathrm{if}\ close_{i} < close_{i-1} \end{matrix} \right. </math>
where:
<math>\operatorname{OBV_{i}}</math> — value of the On Balance Volume indicator in the current period;
<math>\operatorname{OBV_{i - 1}}</math> — value of the On Balance Volume indicator in the previous period;
<math>\operatorname{Volume_{i}}</math> — volume of the current bar.
Usage
The On Balance Volume indicator is used to confirm price trend and detect possible price reversals.
Divergences
The divergence between OBV and price can be used as a signal of possible price reversal.
When the price makes a new Low, and OBV does not fall as low as before, this may indicate that the previous downtrend is about to reverse.
When the price makes a new High, and OBV does not rise as high as before, this may indicate that the previous uptrend is about to reverse.
Trend Confirmation
OBV can be used to confirm a price trend:
- Increasing price is usually accompanied by increasing OBV.
- Decreasing price is usually accompanied by decreasing OBV.
See Also
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