On-Balance Volume (OBV)

What is 'On-Balance Volume (OBV)'

On-balance volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price. On Balance Volume is a metric developed by Joseph Granville in the 1960s. He believed that, when volume increases sharply without a significant change in the stock's price, the price will eventually jump upward, and vice versa.

BREAKING DOWN 'On-Balance Volume (OBV)'

The theory behind OBV is based on the distinction between smart money – namely, institutional investors – and less sophisticated retail investors. As mutual funds and pension funds begin to buy into an issue that retail investors are selling, volume may increase even as the price remains relatively level. Eventually, volume drives the price upward. At that point, larger investors begin to sell, and smaller investors begin buying.

The following chart depicts OBV. If today's close is greater than yesterday's close, then today's volume is added to yesterday's OBV, and is considered "up volume." However, if today's close is less than yesterday's close, today's volume is subtracted from yesterday's OBV and is considered "down volume."

On-Balance Volume

Chart created with TradeStation

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RELATED FAQS
  1. What is the On-Balance Volume (OBV) formula and how is it calculated?

    Read about the formula and calculation for On Balance Volume, or OBV, which is a technical indicator that shows movements ... Read Answer >>
  2. Why is On-Balance Volume (OBV) important for traders and analysts?

    Discover reasons why the on-balance volume momentum indicator has become one of the most widely used and trusted tools of ... Read Answer >>
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    Read about some of the basic ways On-Balance Volume indicators can be used by forex traders to measure volume trends and ... Read Answer >>
  4. What is a common strategy traders implement when using On-Balance Volume (OBV)?

    Read about common trading strategies that are implemented based off of signals generated from the On-Balance Volume momentum ... Read Answer >>
  5. What are the main differences and similarities between Money Flow Index & On Balance ...

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    Discover why it is important to confirm the price trend signals generated from the on-balance volume indicator and which ... Read Answer >>
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