On Balance Volume (OBV) Author: Financial-edu.com
On Balance Volume (OBV) is a technical indicator developed in the 1940's by Woods and Vignolia and given the name we use today in the 1960's by Joseph Granville. The purpose of OBV is to help determine future directional price trend by observing cumulative directional volume traded. This indicator adds and subtracts volume to a running total, depending on whether price moves up or down.
On Balance Volume is a fairly simple indicator that can provide important trend confirmation and convergence/divergence signals over longer term time periods (weeks, months). OBV's simplicity is its strength -- it does not behave oddly when market conditions suddenly change or price gaps develop. On shorter time period data (daily, hourly) OBV may appear that it can predict future price movement, but these shorter term signals tend to be overwhelmed easily by large volume changes. OBV also suffers from past cumulative volume effects. Where volume was very high in the near past and volume is declining while price action is still active, the OBV movement will be "muffled" by larger past movements, and it becomes difficult to discern changes in directional volume. Likewise, where volume has been fairly low in the near past and suddenly picks up, the new OBV movements suddenly take on larger magnitude, even if price does not move a large amount. Other more complex volume-price indicators that incorporate volatility do not suffer from these effects.
For a pre-built OBV Excel worksheet see: http://www.financial-edu.com/ez-files-technical-indicator-library.php
On Balance Volume formulas are as follows:
If today's price close > yesterday's price close then OBV = yesterday's OBV + today's volume.
If today's price close < yesterday's price close then OBV = yesterday's OBV - today's volume.
If today's price close = yesterday's price close then OBV = yesterday's OBV