Joe Granville introduced the On Balance Volume (OBV) indicator in his 1963 book, Granville’s New Key to Stock Market Profits.A method used in technical analysis to detect momentum, the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security.OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the “smart” traders are starting to exit their positions and that a shift in trend may be coming.
On Balance Volume should be used in conjunction with other indicators.
Ranging market
During a ranging market watch for a rising or falling On Balance Volume:
Rising OBV warns of an upward breakout.
Falling OBV warns of a downward breakout.
The idea behind the OBV indicator is that changes in the OBV will precede price changes. A rising volume can indicate the presence of smart money flowing into a security. Then once the public follows suit, the security’s price will likewise rise.
Like other indicators, the OBV indicator will take a direction. A rising (bullish) OBV line indicates that the volume is heavier on up days. If the price is likewise rising, then the OBV can serve as a confirmation of the price uptrend. In such a case, the rising price is the result of an increased demand for the security, which is a requirement of a healthy uptrend.
However, if prices are moving higher while the volume line is dropping, a negative divergence is present. This divergence suggests that the uptrend is not healthy and should be taken as a warning signal that the trend will not persist.
The mechanism of its work is not difficult. When the closing price of the ongoing bar is under that of the previous bar, the volume will be taken from the previous value of OBV. When the closing price of the ongoing bar is above that of the previous bar, the value of the volume of the ongoing bar is to be added to the previous value of OBV.