On-Balance Volume (OBV)

On-Balance Volume (OBV) is a technical indicator used to measure buying and selling pressure in a stock or other security. The indicator is calculated by adding the volume of a security on up days (when the closing price is higher than the previous day’s closing price) and subtracting the volume on down days (when the closing price is lower than the previous day’s closing price). The OBV line is a running total of these positive and negative volume changes, and it can be used to identify trends in buying and selling pressure over time.

How to calculate OBV?

The On-Balance Volume (OBV) indicator is calculated as follows,

Begin with a base value of zero at the start of the period being analyzed.
For each day, calculate the volume-weighted change in the security’s price:
If the closing price is higher than the previous day’s closing price, add today’s volume to the OBV.
If the closing price is lower than the previous day’s closing price, subtract today’s volume from the OBV.
If the closing price is the same as the previous day’s closing price, the OBV does not change.
Repeat step 2 for each day in the period being analyzed.
The final OBV value represents the cumulative volume-weighted change in the security’s price over the entire period

How is OBV used in trading?

The idea behind OBV is that when the price of a security is increasing and the OBV is also increasing, it is a sign of strong buying pressure, which is bullish for the stock. Conversely, when the price is decreasing and the OBV is also decreasing, it is a sign of strong selling pressure, which is bearish for the stock. The OBV can also be used to generate trading signals, such as when the OBV line diverges from the price trend or when it makes a new high or low while the price is not doing the same