The formula

Application

Total volume

Volume (finance)

Volume, or trading volume, is a term in capital markets, referring to the number of shares or contracts traded in a security or in an entire market during a given period of time....

 for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value. So, when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too. If OBV fails to go past its previous rally high, then this is a negative divergence

Divergence

In vector calculus, divergence is a vector operator that measures the magnitude of a vector field's source or sink at a given point, in terms of a signed scalar. More technically, the divergence represents the volume density of the outward flux of a vector field from an infinitesimal volume around...

, suggesting a weak move.

The technique, originally called "cumulative volume" by Woods and Vignolia, was later named in 1946, "on-balance volume" by Joseph Granville

Joseph Granville

Joseph E. Granville , often called Joe Granville, is a financial writer and investment speaker. He popularized the use of "on balance volume", a technique of technical analysis that attempts to predict future prices of stocks, commodities, and other financial assets traded on financial markets for...

 who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits. The index can be applied to stocks individually based upon their daily up or down close, or to the market as a whole, using breadth of market data, i.e. the advance/decline ratio.

OBV is generally used to confirm price moves. The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend more volume on up days than down days.

Similar indicators

Other Price × Volume indicators:

• Money Flow
  Money Flow
  Money Flow Index is an oscillator calculated over an N-day period, ranging from 0 to 100, showing money flow on up days as a percentage of the total of up and down days. Money flow in technical analysis is typical price multiplied by volume, a kind of approximation to the dollar value of a day's...
  
  
• Price and Volume Trend
  Price and Volume Trend
  Volume–price trend is a technical analysis indicator intended to relate price and volume in the stock market...
  
  
• Accumulation/distribution index
  Accumulation/distribution index
  Accumulation/distribution index is a technical analysis indicator intended to relate price and volume in the stock market.-Formula:This ranges from -1 when the close is the low of the day, to +1 when it's the high. For instance if the close is 3/4 the way up the range then CLV is +0.5...
  
  

See also

• Dimensional analysis
  Dimensional analysis
  In physics and all science, dimensional analysis is a tool to find or check relations among physical quantities by using their dimensions. The dimension of a physical quantity is the combination of the basic physical dimensions which describe it; for example, speed has the dimension length per...
  
  — explains why volume and price are multiplied (not divided) in such indicators

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