On-balance Volume (OBV)
On balance volume (OBV) is a technical analysis indicator based on a cumulative total volume. Volume on an up day (close higher than previous close) is added and volume on a down day is subtracted.
The starting point for an OBV total, ie. the zero point, is arbitrary. Only the shape of the resulting indicator is used, not the actual level of the total.
from wikipedia.org
Joseph Granville, creator of the On Balance Volume indicator, shares this same insistence on the importance of volume analysis. He exclaims that volume precedes price, and he even goes so far as to argue that volume is cause and price is effect.
The indicator he designed to track the flow of volume in and out of a stock or index is called “On Balance Volume,” or OBV. OBV is a running total of volume. Designed in the early 1960s, before computers were used in stock analysis, its calculation is simple. An arbitrary number (usually a very large one) is used to begin an OBV line. On days when price closes higher, all the volume of that day is added to this line. On days when price closes lower, the volume is subtracted from the line.
Note: The importance of the OBV line is its trend, the direction the line is going, not how high the line is. Lets say that in another way: The highest point in the OBV line is not where volume is greatest, or where volume flow provides the greatest support to the price line.
Like other indicators, the OBV indicator will take a direction. A rising (bullish) OBV line indicates that the volume is heavier on up days. If the price is likewise rising, then the OBV can serve as a confirmation of the price uptrend. In such a case, the rising price is the result of an increased demand for the security, which is a requirement of a healthy uptrend.
However, if prices are moving higher while the volume line is dropping, a negative divergence is present. This divergence suggests that the uptrend is not healthy and should be taken as a warning signal that the trend will not persist.
The numerical value of OBV is not important, but rather the direction of the line. A user should concentrate on the OBV trend and its relationship with the security’s price.