UK Accounting Glossary
The On-Balance Volume (OBV) indicator provides a running total of volume and shows whether the volume is flowing into or out of a given security. This indicator was developed by Joe Granville.
The on-balance volume (OBV) is an indicator that calculates a running total of the trading volume of a market or individual security. If the price close today is higher than yesterday, the total trading volume is ‘up volume’. If the price decreased, it is ‘down volume’. You compute the on-balance volume by adding ‘up volume’ to the previous day’s on-balance volume and subtracting ‘down volume’ to find the current on-balance volume. The theory is that you can see money moving into or out of a security by tracking on-balance volume. The assumption is that changes in on-balance volume precede significant price changes and price trend. On-balance volume is a forecasting, not a trend-confirming indicator. On-balance volume does not consider the amount of price change, only the amount of volume of the price movement. If on-balance volume begins to rise while the stock price remains relatively flat, a technical analyst would view this as a sign of increasing demand and expect the stock price to rise.
Buy (long) signals are recommended when there is a bullish divergence between the price and the On-Balance-Volume indicator. Sell (short) signals are recommended when there is a bearish divergence between the price and OBV.
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This glossary post was last updated: 7th February 2020.