On-balance volume definition

What is on-balance volume (OBV)?

On-balance volume (OBV) is a form of technical analysis which enables traders to make predictions about future price movements based on the asset’s previous trading volume. OBV is mostly used in shares trading, because the volume has an especially large influence on the way share prices move.

Trading volume is the amount that an asset has been traded during a given time period. Traders who use OBV believe that a sharp increase in trading volume, without a reciprocal increase in the asset’s price, will cause the market price to suddenly increase or decrease.

How to calculate on-balance volume

OBV is a cumulative result, which means that it is effectively a running total of an asset’s trading volume. The OBV is the total volume, and it accounts for both positive and negative changes in an asset’s trading volume.

A simplified version of the OBV formula is as follows:

1. If the closing price today is higher than it was yesterday, you’d add the current trading volume to the previous day’s OBV to get the new OBV figure
2. If the closing price today is lower than it was yesterday, you’d subtract the current trading volume from the previous day’s OBV to get the new OBV figure
3. If the closing price today equals yesterday’s closing price, then the current OBV is the same as yesterday’s OBV

Example of on-balance volume

Let’s look at the table below as an example of how to calculate OBV using the OBV formula.

On day one, the OBV is simply the daily trading volume. For day two however, you can calculate the OBV by seeing whether the closing price is higher than it was on day one. In this case, the closing price has risen by $5 on day two. As a result, the OBV can be calculated by adding the daily trading volume of day two to that of day one – 10,000 to 14,000 – which would give you 24,000 as the OBV for day two.

If the closing price is less than the previous day – as shown in the example on day four compared to day three – then you would subtract the daily volume of day four from the OBV of day three. This means that you would take 10,000 (the trading volume for day four) from 36,000 (the OBV on day three), which gives an OBV for day four of 26,000.