Calculating On-Balance Volume

The on-balance volume (OBV) creates a running total of positive and negative trading volume for a security. One of the original momentum oscillators, OBV spawns from Joe Granville’s theory that volume precedes price in an instructive, measurable fashion.

Key Takeaways

• The on-balance volume (OBV) displays the total positive and negative trading volume for a stock or security.
• To measure OBV, investors evaluate the closing prices between two trading days.
• OBV is commonly used to track the activity of large, institutional investors.

On-Balance Volume (OBV) Formula

The formula’s calculation rises whenever the volume on up days is greater than on down days and vice versa. To measure a security’s OBV, traders must understand the relationship between the closing prices of 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​

Important

If a stock closes higher than the previous close, the day’s volume is considered up-volume. If a stock closes lower than the last close, the day’s volume is considered down-volume.

Using OBV

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 use the 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 masses, hoping to showcase opportunities for buying against incorrect prevailing trends.

How Does Time Affect OBV?

Despite being plotted on a price chart and measured numerically, the individual quantitative value of OBV is irrelevant. The indicator 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.

What Is a Momentum Oscillator?

OBV is a momentum oscillator that measures a stock’s price changes over time.

How Is OBV Affected by Large Investors?

OBV can be affected numerically when institutional money drives up the price of an asset. These large investors may then sell after other investors jump in.

The Bottom Line

On Balance Volume (OBV) calculates buying and selling as a cumulative indicator that adds volume on up days and subtracts volume on down days. To calculate OBV, investors evaluate the closing prices between two trading days.

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