On Balance Volume
The On Balance Volume or OBV is a momentum indicator that was introduced by Joseph Granville in 1963 to show the relationship between the volume and price changes over time. The concept behind this indicator is volume precedes prices. It measures the accumulation and distribution of the security through the volume and price movements. The volume is added to a cumulative total when the close is up (i.e. accumulation is imminent) and the volume is subtracted from the cumulative total when the close is down (i.e. distribution is increasing). The cumulative total of the volume forms the OBV line.
OBV = Yesterday’s OBV + Today’s Volume, if Closing Price > Yesterday’s Closing Price
OBV = Yesterday’s OBV – Today’s Volume, if Closing Price < Yesterday’s Closing Price
OBV = Yesterday’s OBV, if Closing Price = Yesterday’s Closing Price
A bullish divergence confirms when prices are moving lower while the OBV line is rising. A negative divergence is present when the prices are moving higher while the OBV line is falling.