On Balance Volume [OBV] Indicator

#volume #accumulation

Creator : Joe Granville

A running total of volume. It adds the day’s volume when price closes up and subtracts it when price closes down. It shows whether volume is flowing into or out of the stock.

Default period: None (cumulative line); optional 20 SMA on OBV as signal line.

On Balance Volume (OBV) is a popular indicator for volume analysis.

The On Balance Volume indicator shows two lines below the chart.

1. Green line represents On Balance Volume
2. The red line represents the average of the OBV line

When the price increases, the volume is added to the price, and when the price decreases, the volume is deducted from the price. When OBV line is above its average line, it shows that the trend is strong.

Rising OBV shows buying volume is stronger. Falling OBV shows selling volume is stronger.

Useful readings:

OBV rising with price: Uptrend supported by volume, healthy

OBV falling with price: Downtrend supported by volume, healthy

Price rises but OBV is flat or falling: Rally has weak volume, be careful

Price falls but OBV is flat or rising: Selling has weak volume, bounce possible

OBV breaks its own high before price does: Smart money buying early, bullish clue

OBV breaks its own low before price does: Smart money selling early, bearish clue

Objective rules:

Bullish: OBV crosses above its 20-period average.

Bearish: OBV crosses below its 20-period average.

Breakout confirmation: Take a price breakout only if OBV also makes a new 20-bar high (long) or low (short)

Divergence rule: Price at new high but OBV below its last high for 2+ swings, tighten stops on longs

What makes it unique:

It was the first tool to argue that volume moves before price. Its breakouts and divergences often front-run price breakouts by days.

The indicator table value in TradePoint & RZone also provides you with a list of all values of this indicator for any group of stocks. This will allow you to compare the readings of this indicator across different stocks.

This indicator is also available in the System Builder on RZone & TradePoint for all charting methods. Using the system builder, you can develop various strategies based on the different conditions already present in this indicator. Additionally, it can be used with other indicators or price patterns to develop effective trading strategies. For any group of stocks and market segments, you can scan and backtest stocks based on those strategies.

The indicator is applicable to all types of charting. It is calculated based on the number of columns on P&F charts, bricks on Renko charts, lines on Line-break charts, candles on Heikin-Ashi charts, and lines on Kagi charts. While the formula and reading of the indicators remain the same, they become more dynamic on these charts.