The purpose of On Balance Volume is to show whether cash is flowing into or out of a market or security. The OBV is similar to the Accumulation/ Distribution Line, as it corresponds to a sales chart that is related to the daily change in prices. For falling prices, the simple volume is subtracted from yesterday's OBV, or added for rising prices.
For rising prices, the new OBV is calculated from yesterday's value plus today's volume. For falling prices, the volume is subtracted.Formula
where C is the closing price and V is the volume.Parameters
There are no parameters.Interpretation
The OBV is intended to predict trend changes in the underlying instrument through a trend change in the OBV, and thus to display the activity of the big capital. For this reason, one mainly observes divergences between the OBV line and the underlying instrument. If a new index high or index low in the underlying instrument is not confirmed by the corresponding high or low in the OBV line, it is probably that the trend will change soon. It may be assumed that imminent bottoms are indicated with relatively high accuracy, whilst the OBV signals often come too late for the peaks.
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