On-Balance Volume

ON-BALANCE VOLUME
A price-volume relationship.

Based on a cumulative volume, the on-balance volume relates price and volume in the stock market, and it has the formula:

OBV = OBVprev
+ volume … if close > closeprev then { + volume}
+ 0 … if close = closeprev then { + 0}
– volume … if close < closeprev then { – volume}

If the closing price is higher on a particular day, the total volume is assigned a positive value. The reverse is applied if the closing price is lower (a negative value is assigned). So prices and OBV are directly related. If prices are going up, OBV should also be going up.

Woods and Vignolia originally called this technique cumulative volume. In 1946, Joseph Granville termed it on-balance volume. It can be applied to stocks based on their daily upward or downward close. OBV is generally used to check price moves. The general assumption is that volume is higher on days where the price move is in the dominant direction. For example, there is more volume on up days than during down days.