A:

On-balance volume (OBV), creates a running total of positive and negative trading volume for a stock or security. One of the original momentum oscillators, OBV spawns from Joe Granville's theory that volume precedes price in an instructive, measurable fashion. The formula's calculation is simple, rising whenever volume on up days is greater than volume on down days and vice versa.

To measure a security's OBV, you need to understand the relationship of closing prices between two successful trading days. When the second day's price closes above the prior day's close, OBV = previous OBV + current trading volume. If prices close lower on the second day, OBV = previous OBV - current trading volume.

Despite being plotted on a price chart and measured numerically, the actual individual quantitative value of OBV is not relevant. The indicator itself is cumulative, while the time interval remains fixed by a dedicated starting point, meaning the real number value of OBV arbitrarily depends on the start date. Instead, traders and analysts look to the nature of OBV movements over time; the slope of the OBV line carries all of the weight of analysis.

Analysts look to volume numbers on the OBV to track large, institutional investors. They treat divergences between volume and price as a synonym of the relationship between "smart money" and the disparate masses, hoping to showcase opportunities for buying against incorrect prevailing trends. For example, institutional money may drive up the price of an asset, then sell after other investors jump on the bandwagon. (For related reading, see "On-Balance Volume: The Way to Smart Money.")

RELATED FAQS
  1. How can I calculate a company's forward p/e in Excel?

    Discover why trading volume is higher when the price of a security changes. Supply and demand is the mechanism through which ... Read Answer >>
  2. Are Stocks With Large Daily Volume Less Volatile?

    There is a fairly direct relationship between the volume of a traded stock and its volatility. Read Answer >>
  3. What is the difference between open interest and volume?

    Learn how to interpret the relationships between price, volume and open interest in the options and futures markets. Read Answer >>
  4. What is the formula for calculating net present value (NPV) in Excel?

    Net present value is used to estimate the profitability of projects or investments. Here's how to calculate NPV using Microsoft ... Read Answer >>
  5. What's the difference between a capital market and the stock market?

    Learn about the differences between stock market and capital market. Identify several important stock markets and understand ... Read Answer >>
  6. What are the most common momentum oscillators used in day trading?

    Take a look at some commonly used momentum oscillators that can also be used for intraday trading, such as stochastic oscillators ... Read Answer >>
Related Articles
  1. Trading

    On-Balance Volume: The Way To Smart Money

    This momentum indicator was designed to predict when major market moves would occur.
  2. Trading

    How to Use Volume to Improve Your Trading

    Volume is a simple yet powerful way for traders and investors to increase profits and minimize risks.
  3. Trading

    A Big Red Flag Is Popping Up on Amazon Stock

    This technical pattern may signal a bearish turn in Amazon’s stock price.
  4. Trading

    Interpreting Volume for the Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume.
  5. Trading

    3 Nasdaq-100 Stocks Ready to Play Catch-Up

    These Nasdaq-100 components show stronger buying interest than price gains, predicting the price will play catch up in coming months.
  6. Investing

    Will "FANG" Stocks Outperform in 2016?

    Facebook held the most bullish accumulation-distribution pattern into year’s end, telling investors to focus on this issue in 2016.
  7. Trading

    What the Market Open Tells You

    The first few moments of trading provide a lot of information that can give insight into the market's moves for the day.
RELATED TERMS
  1. Net Volume

    Net volume is a technical indicator that's calculated by subtracting ...
  2. Volume Analysis

    Volume analysis is the examination of the number of shares or ...
  3. Low Volume Pullback

    A low volume pullback is a technical correction toward an area ...
  4. Average Daily Trading Volume - ADTV

    The Average Daily Trading Volume (ADTV) is the average amount ...
  5. Dollar Volume Liquidity

    The price of a stock or ETF multiplied by its daily trading volume ...
  6. Noise Trader

    Noise trader is generally a term used to describe investors who ...
Trading Center