On-Balance Volume
On-balance Volume (OBV) is a trading momentum indicator that uses volume flow to predict changes in price. OBV shows crowd sentiment that can predict a bullish or bearish outcome.
Comparing relative action between price bars and OBV generates more actionable signals than green or red volume histograms.
OBV is based on the principle that volume precedes price movement. It keeps track of the cumulative trading volume, focusing on whether trading volume is flowing into or out of an asset. This is done by adding or subtracting the volume of each trading period based on the price direction.
As the OBV increases, it suggests that more volume is flowing into the asset, indicating buying pressure and strength in the current trend. Conversely, if the OBV decreases, it signals that more volume is moving out of the asset, indicating selling pressure and potential weakness in the trend.
OBV
Calculation
On an up period (n), where the closing price is higher than the previous period (n-1):
OBV(n) = OBV(n-1) + Volume(n).
On a down period (n), where the closing price is lower than the previous period (n-1):
OBV(n) = OBV(n-1) - Volume(n).
On a period (n) when the closing price is unchanged:
OBV(n) = OBV(n-1)
Where:
OBV(n) is the On-Balance Volume for the current period "n".
OBV(n-1) is the On-Balance Volume for the previous period "n-1".
Volume(n) is the trading volume during the current period "n"
This formula calculates the OBV for each period based on the price direction (up, down, or unchanged) and the trading volume during that specific period.
