Name, Sometimes Called:
On Balance Volume
Often abbreviated as OBV.
Brief Description:
The On Balance Volume (OBV) indicator
relates volume
to closing price. It shows whether a security is being purchased
or sold.
Definitions, Formulas:
On Balance Volume (OBV) is an indicator
that relates volume
to closing price. It shows whether a security is being purchased
or sold. When the security closes higher than its previous close,
that day’s volume is considered to be up-volume. Conversely,
when the security closes lower than its previous close, then that
day’s volume is considered to be down-volume.
Calculate OBV by adding the period’s volume to a running total
when the security’s price closes up, and subtracting the period’s
volume from the running total when the security’s price closes down.
Notice that only the price direction, not the amount, matters in
the calculation.
To begin the calculation, set OBV to a large positive number,
to avoid the running total being negative. We used 10 times the
average daily volume as of 1/1/2002, or when we started tracking
the issue. We then rounded up that value to the nearest order of
magnitude. Note that changes in the OBV are relevant; its actual
value is not.
Then perform the following:
If CloseTODAY exceeds CloseYESTERDAY
then OBV = OBV + VolumeTODAY
If CloseTODAY is less than CloseYESTERDAY
then OBV = OBV – VolumeTODAY
If CloseTODAY equals CloseYESTERDAY
then OBV = OBVYESTERDAY
Once OBV has been calculated, then calculate its three-period
exponentially smoothed average (EMA):
EMA(3)(OBV)
Positive Development Calculation:
For this technical analysis indicator, a new positive
development (NPD)
occurs when OBV crosses above its three-period EMA. That is, when
OBV x+ EMA(3) (OBV).
This TAI is no longer positive when OBV crosses under its three-period
EMA. That is, when OBV x- EMA(3) (OBV).
If this TAI is still positive tomorrow, it will no longer be new,
but will be a Cumulative Positive Development (CPD)
If this TAI was a new positive development (NPD)
yesterday, and is still positive today, then it becomes a cumulative
positive development (CPD)
.
History:
On Balance Volume, commonly abbreviated to OBV, was
developed by Woods and Vignolia during the mid-1940s. It remained
relatively unknown until the mid to late 1960s, when it was popularized
by Joseph E. Granville through his book A New Key to Stock Market
Profits, and later in Granville’s second book, New Strategy
of Daily Stock Market Timing for Maximum Profits (Prentice-Hall,
Englewood Cliffs, NJ, 1976). The indicator
quantifies price and volume trends.
Its developers assume that OBV changes precede price changes.
That is, they believe a rising OBV indicates that “smart traders”
are buying early at a low price.
The chart below shows the OBV indicator in use. There was a positive
development on 11/2/2005 when OBV x+ EMA(3)(OBV). It correctly forecast
a price increase in the short
term. On 11/15/2005 the OBV x- EMA(3)(OBV) and the indicator
was no longer positive. Notice that drop from 40 on 11/18/2005?
If anyone knows why that happened please let us know.
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