On-Balance Volume (OBV) Definition

What’s On-Stability Quantity (OBV)?

On-balance quantity (OBV) is a technical buying and selling momentum indicator that makes use of quantity movement to foretell modifications in inventory worth. Joseph Granville first developed the OBV metric within the 1963 e-book Granville’s New Key to Inventory Market Income.

Granville believed that quantity was the important thing power behind markets and designed OBV to challenge when main strikes within the markets would happen based mostly on quantity modifications. In his e-book, he described the predictions generated by OBV as “a spring being wound tightly.” He believed that when quantity will increase sharply with out a vital change within the inventory’s worth, the value will ultimately bounce upward or fall downward.

The System For OBV Is


$beginaligned &textOBV = textOBV_prev + begincases textvolume, & textif shut > textclose_prev text0, & textif shut = textclose_prev -textvolume, & textif shut < textclose_prev endcases &textbfwhere: &textOBV = textCurrent on-balance quantity degree &textOBV_prev = textPrevious on-balance quantity degree &textvolume = textLatest buying and selling quantity quantity endaligned$​OBV=OBVprev​+⎩⎪⎨⎪⎧​quantity,0,−quantity,​if shut>shutprev​if shut=shutprev​if shut<shutprev​​the place:OBV=Present on-balance quantity degreeOBVprev​=Earlier on-balance quantity degreequantity=Newest buying and selling quantity quantity​

Calculating OBV

On-balance quantity supplies a working complete of an asset’s buying and selling quantity and signifies whether or not this quantity is flowing in or out of a given safety or foreign money pair. The OBV is a cumulative complete of quantity (optimistic and destructive). There are three guidelines carried out when calculating the OBV. They’re:

1. If right now’s closing worth is increased than yesterday’s closing worth, then: Present OBV = Earlier OBV + right now’s quantity

2. If right now’s closing worth is decrease than yesterday’s closing worth, then: Present OBV = Earlier OBV – right now’s quantity

3. If right now’s closing worth equals yesterday’s closing worth, then: Present OBV = Earlier OBV

What Does On-Stability Quantity Inform You?

The speculation behind OBV is predicated on the excellence between good cash – specifically, institutional buyers – and fewer subtle retail buyers. As mutual funds and pension funds start to purchase into a problem that retail buyers are promoting, quantity might enhance at the same time as the value stays comparatively degree. Finally, quantity drives the value upward. At that time, bigger buyers start to promote, and smaller buyers start shopping for.

Regardless of being plotted on a worth chart and measured numerically, the precise particular person quantitative worth of OBV is just not related. The indicator itself is cumulative, whereas the time interval stays fastened by a devoted start line, which means the true quantity worth of OBV arbitrarily relies on the beginning date. As an alternative, merchants and analysts look to the character of OBV actions over time; the slope of the OBV line carries the entire weight of research.

Analysts look to quantity numbers on the OBV to trace giant, institutional buyers. They deal with divergences between quantity and worth as a synonym of the connection between “good cash” and the disparate lots, hoping to showcase alternatives for purchasing towards incorrect prevailing developments. For instance, institutional cash might drive up the value of an asset, then promote after different buyers bounce on the bandwagon.

Instance Of How To Use On-Stability Quantity

Beneath is a listing of 10 days’ price of a hypothetical inventory’s closing worth and quantity:

1. Day one: closing worth equals $10, quantity equals 25,200 shares
2. Day two: closing worth equals $10.15, quantity equals 30,000 shares
3. Day three: closing worth equals $10.17, quantity equals 25,600 shares
4. Day 4: closing worth equals $10.13, quantity equals 32,000 shares
5. Day 5: closing worth equals $10.11, quantity equals 23,000 shares
6. Day six: closing worth equals $10.15, quantity equals 40,000 shares
7. Day seven: closing worth equals $10.20, quantity equals 36,000 shares
8. Day eight: closing worth equals $10.20, quantity equals 20,500 shares
9. Day 9: closing worth equals $10.22, quantity equals 23,000 shares
10. Day 10: closing worth equals $10.21, quantity equals 27,500 shares

As might be seen, days two, three, six, seven and 9 are up days, so these buying and selling volumes are added to the OBV. Days 4, 5 and 10 are down days, so these buying and selling volumes are subtracted from the OBV. On day eight, no modifications are made to the OBV because the closing worth didn’t change. Given the times, the OBV for every of the ten days is:

1. Day one OBV = 0
2. Day two OBV = 0 + 30,000 = 30,000
3. Day three OBV = 30,000 + 25,600 = 55,600
4. Day 4 OBV = 55,600 – 32,000 = 23,600
5. Day 5 OBV = 23,600 – 23,000 = 600
6. Day six OBV = 600 + 40,000 = 40,600
7. Day seven OBV = 40,600 + 36,000 = 76,600
8. Day eight OBV = 76,600
9. Day 9 OBV = 76,600 + 23,000 = 99,600
10. Day 10 OBV = 99,600 – 27,500 = 72,100

The Distinction Between OBV And Accumulation/Distribution

On-balance quantity and the accumulation/distribution line are related in that they’re each momentum indicators that use quantity to foretell the motion of “good cash”. Nevertheless, that is the place the similarities finish. Within the case of on-balance quantity, it’s calculated by summing the amount on an up-day and subtracting the amount on a down-day.

The method used to create the buildup/distribution (Acc/Dist) line is sort of totally different than the OBV proven above. The method for the Acc/Dist, with out getting too difficult, is that it makes use of the place of the present worth relative to its current buying and selling vary and multiplies it by that interval’s quantity.

Limitations Of OBV

One limitation of OBV is that it’s a main indicator, which means that it could produce predictions, however there may be little it may say about what has really occurred by way of the indicators it produces. Due to this, it’s susceptible to supply false indicators. It could actually subsequently be balanced by lagging indicators. Add a shifting common line to the OBV to search for OBV line breakouts; you possibly can verify a breakout within the worth if the OBV indicator makes a concurrent breakout.

One other be aware of warning in utilizing the OBV is that a big spike in quantity on a single day can throw off the indicator for fairly some time. As an example, a shock earnings announcement, being added or faraway from an index, or huge institutional block trades may cause the indicator to spike or plummet, however the spike in quantity is probably not indicative of a pattern.