What is it?

The On Balance Volume indicator or OBV, is an indicator that focuses on the importance of volume and how it can affect a give prince and asset's momentum. OBV is based on the idea tha volume precedes price, so if a security is seein an increasing OBV it is a signal that volume is increasing during the upward price moves; when it decreases, it means the opposite, volume is increasing on the down days. 

How is it calculated?

The OBV is simply a running total of positive and negative volume during any given period.

If the closing price is above the prior close price then: 
Current OBV = Previous OBV + Current Volume

If the closing price is below the prior close price then: 
Current OBV = Previous OBV  -  Current Volume

If the closing prices equals the prior close price then:
Current OBV = Previous OBV (no change)

How to use it?

The value of the OBV line is not important, what it's important is the characteristics of the line. Firstly, the most important is the trend, this will help us find out in which direction the volume is flowing.
























If we are following a trend, we would like to see the OBV moving in the same direction of the trend. That means that the trend is being supported by volume.


Another use of the OBV is to look for divergencies. When the OBV stops going higher or even begins to trend downwards while a security price is still going up, that is s sign that the existing trend is weakening and may reverse.



An example of a bullish divergence. Notice how the OBV started to trend up before the price did.


The on-balance volume measure is one of the least complex volume indicators that try to measure price and volume together. While there are more complex indicators, it is the ease of understanding and use that make this volume indicator so popular.