Stock Market Analysis Software

On Balance Volume (OBV) is a technical analysis momentum indicator used to relate trading volume to price change. To achieve this, the accumulated volume is determined by adding or subtracting the daily volume depending on stock price movements as per the formula below.

OBV Calculation

OBV Usage

OBV is based on the idea that volume precedes price. A rising OBV can indicate the presence of smart money flowing into (or out of) a security which may initiate a trend with ensuing investors. A plot of 3M’s stock price and OBV over the 18 month period to June 2010 is shown in Figure 1.

The numerical value of OBV is not important or comparative between stocks. The main focus is the OBV trend and its relationship with stock price.

Figure 1: On Balance Volume (OBV) Example – MMM

The OBV trend can indicate whether buying pressure is increasing or decreasing. If volume starts decreasing on days of stock price increases the OBV will tend to flatten out. This indicates that buying pressure is weakening along with the upward price trend and a reversal may be on the way.

Figure 1 Note: A strong upward trend was established in 3M’s OBV in March 2009 through to September 2009 with the stock price rising from $40 to $75. From September 2009 onwards the buying pressure was weakening as can be seen from a flattening out of the OBV signal until a trend reversal was confirmed in mid May 2009.

The OBV signal can also be used to identify divergence with the stock price trend to indicate that a trend reversal may soon occur.

OBV Limitations

One limitation of the OBV indicator is that it doesn’t take into account the magnitude of price change. E.g. the OBV would be the same if a stock price went up 10% or 0.1%. However, the OBV would be quite different if the 0.1% increase ended in a 0.1% stock price decrease.

Chart images were generated using First Class Trader’s stock analysis software.