On Balance Volume

On Balance Volume (OBV) indicates market momentum. Introduced by Joseph Granville, it’s a simple indicator that compares price and volume:
  • The volume is positive if the closing price is higher than the previous close
  • The volume is negative if the closing price is lower
  • The volume is ignored if the price doesn’t change
The theory behind OBV is that smart investors start buying and selling before the majority do. The OBV detects this trend and starts to move before the price does. The price then moves as more traders start to invest.

Rising and falling trends

OBV trends are established in the following ways:
  • There’s an upwards trend if peaks are rising and troughs are also rising
  • A downwards trend starts with falling peaks and troughs
Once established, trends continue until they are broken:
  • An upwards trend is broken by a downwards trend
  • A downwards trend is broken by an upwards trend
If the OBV starts to move sideways, the current trend is only broken after three days. For example, if there’s an upwards trend, and the market then moves sideways for two days before resuming its rise, the trend hasn’t been broken.

Breakouts

The breakout signals with OBV are straightforward:
  • Buy long at the start of a rising trend
  • Sell short at the start of a falling trend
  • Hold your position until the trend ends

Non-confirmation

If the price rises or falls before the OBV does, this is a non-confirmation. This can happen at the top of bull markets and at the bottom of bear markets.

On Balance Volume

Calculation

OBV is calculated by adding the current trading volume to the previous OBV value if the closing price rises, subtracting the volume if the price falls, and doing nothing if the price remains the same.

If CLOSE( J ) > CLOSE( J – 1 )

OBV (J) = OBV( J – 1 ) + VOLUME( J )

else if CLOSE( J ) < CLOSE( J – 1 )

OBV (J) = OBV( J – 1 ) – VOLUME( J )

else

OBV (J) = OBV( J – 1 )

J is the current interval

VOLUME is the trading volume for an interval

CLOSE is the closing price for an interval


You can find more information about technical indicators in the MetaTrader 4 User Guide. Select Help > Help Topics > Analytics > Technical Indicators.