On balance volume (OBV) is a leading volume indicator. The OBV is a cumulative total of the up and down volume. When the close is higher than the previous close, the volume is added to the running total, and when the close is lower than the previous close, the volume is subtracted from the running total.
To interpret the OBV, you can observe the movement of the OBV and the price. If the price moves before the OBV, then it is a non-confirmed move. A series of rising peaks, or falling troughs, in the OBV indicates a strong trend. If the OBV is flat, then the market is not trending.
The formulae for computing the OBV are as follows:
- If close > close-1, then OBV = OBV-1 + volume
- If close < close-1, then OBV = OBV-1 - volume
- If close = close-1, then OBV = OBV-1
Although it is a good idea to know the mathematics of how this works, this recipe does not require you to understand or remember the given formula. We use a third-party Python package...
