What is 'On-Balance Volume (OBV)'
On-balance volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville developed the OBV metric in the 1960s. He believed that, when volume increases sharply without a significant change in the stock's price, the price will eventually jump upward, and vice versa.
Explaining 'On-Balance Volume (OBV)'
The theory behind OBV is based on the distinction between smart money – namely, institutional investors – and less sophisticated retail investors. As mutual funds and pension funds begin to buy into an issue that retail investors are selling, volume may increase even as the price remains relatively level. Eventually, volume drives the price upward. At that point, larger investors begin to sell, and smaller investors begin buying.
On-Balance Volume Example Calculation
Below is a list of 10 days' worth of a hypothetical stock's closing price and volume:
Q&A About On-Balance Volume (OBV)
What does OBV measure?
OBV measures the cumulative volume of trading over a given time period.
How does OBV work?
When there are more buyers than sellers, it shows up as positive numbers on the chart. Conversely, when there are more sellers than buyers, it shows up as negative numbers on the chart.
What does an increase in volume without a significant change in price indicate?
An increase in volume without a significant change in price indicates that prices will eventually jump upward.
What is the On-Balance Volume (OBV)?
The On-Balance Volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price.