On-Balance Volume Meaning

OBV was developed by Joseph Granville in the 1960s. For Granville, volume was a critical factor that could predict stock price movements. Granville applied it only on stocks analysisStocks AnalysisStock analysis is the process of institutional and individual investors evaluating a specific financial instrument, securities industry, or stock market to make informed buying or selling decisions. It entails researching the company and determining its long-term growth potential based on past and current market performance.read more. But soon, traders started using it to analyze other trading markets—Forex, commodityCommodityA commodity refers to a good convertible into another product or service of more value through trade and commerce activities. It serves as an input or raw material for the manufacturing and production units.read more, etc.

Key Takeaways

  • It is a technical indicator of momentum—determines the buying or selling pressure on the asset.The indicator is monitored to forecast the trade direction and near-term price changes in stocks.It is an indicator of the stock market sentiment. It is either a bullish or bearish outcome.

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On-Balance Volume Indicator Strategy Explained

On-balance volume indicator helps understand the trade pressure through volumes. Changes in volume can be used as a leading indicator of stock price variations. The change could be in the volume amount or volume trend.

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  • Investors use the on-balance volume strategy to analyze a stock’s on-balance to detect a trend of increasing trading volumeTrading VolumeThe volume of trade is the overall measure of the number of securities, shares or contracts traded during a particular trading day. read more. This trend can be detected much before the rise in stock prices. Similarly, a falling volume trend indicates a consequent fall in stock price.The OBV metric was introduced by Joseph Granville in 1963 in his Granville’s New Key to Stock Market Profits. Accordingto Granville, when the stock price is relatively flat, and the volume begins to increase or decrease markedly, greater amounts of trading pressure (buying or selling) would lead to a sharp price move— either upside or downside.When a stock’s price continues to rise, but the on-balance volume indicator begins to decline, it indicates a subsequent fall in the stock’s buying momentum. Very soon, the stock price will hit its peak and start a downward trajectory.It is plotted on a price chart, but the individual quantitative value remains irrelevant. The indicator is cumulative. The time interval is constant with a starting point. The OBV real value arbitrarily depends on the start date. Instead, analysts study the nature of OBV movements over time; the OBV slope line carries all of the analysis weight.Analysts track large and institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more by assessing OBV volume numbers. Investors treat volume and price differences to showcase smart money and purchase against incorrect prevailing trends.The on-balance volume formula is similar to the accumulation/distribution line. Both are momentum indicators that predict money movement by studying volume.

Formula

The on-balance volume formula depends on different scenarios.

If the present-day asset’s closing price > the previous day’s closing price:

OBV = Previous OBV + today’s volume

When the asset’s closing = the previous day’s closing price:

OBV = Previous OBV (+ 0)

When the asset’s closing price < the previous day’s closing price:

OBV = Previous OBV – today’s volume

Example

In October 2021, Tata Power marked its high point close to 267 in BSE. Since then, it has been under-defined and ranged consolidation. It has remained inside a broad trading range of 210-250. Once again, signs of a potential uptrend are seen. The Moving Average Convergence Divergence (MACD) has shown a positive crossover. It was running bullish and above the signal line. Recent up-days witnessed above-average volumes.

The relative strength index (RSI) is neutral and does not reflect any divergence against the price. However, in pattern analysis, it is seen breaking out from a falling trend line resistance (bullish). Already, the OBV is high, even before an actual price breakout.

This has been a guide to what is On-Balance Volume and its Meaning. Here we discuss on-balance volume strategy, formula, examples, and the OBV indicator. You may learn more about financing from the following articles –

Since OBV is a leading indicator, it may produce forecasts. But, looking at the bigger picture—no investor can comment on what happened in terms of signals. Therefore, there is room for false positives and misinterpretations. This can potentially balance lagging indicators.

OBV provides fair feedback on major highs and lows and is very useful in measuring the breakout and breakdown potentials. In addition, it predicts bearish divergence depending on the rally.

A high OBV indicates positive volume pressure looking forward to higher prices. Likewise, decreasing OBV refers to negative volume pressure anticipating lower prices.

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