On Balance Volume
Volume is the number of shares or contracts that change ownership over a given period of time. On Balance Volume (“OBV”) is a momentum indicator that relates volume to price change. It is an indication of supply and demand that is independent from price and can relate a great deal about the relative enthusiasm of buyers and sellers in the market place.
On Balance Volume is one indicator that is designed to track changes in volume over time. It is the running total of volume calculated in such a way as to add the period’s volume to a cumulative total if the period’s close was higher than the previous period’s close and to subtract the period’s volume from the cumulative total on down periods. The assumption is that changes in volume will precede changes in price trend. On Balance Volume was created by Joseph Granville and has a number of interpretive qualities and should be used in conjunction with other indications of price trend reversals.
It shows if volume is flowing into or out of a instrument. When the instrument closes higher than the previous close, volume is considered up-volume. When the instrument closes lower than the previous close, all of the period’s volume is considered down-volume.
The basic assumption, regarding OBV analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the instrument by a rising OBV. When the public then moves into the instrument, both the instrument and the OBV will surge ahead.