On-balance volume
From Financial Literacy Wiki
On-balance volume (OBV) is a technical indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.
It is calculated in the following way:
* If Close is Higher : Yesterdays OBI + Today's Volume * If Close is Lower : Yesterdays OBI + Yesterdays Volume * If Close is Equal : Yesterdays OBI
Total volume for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value.Given such a derivation, you can start monitoring OBV at any time.
Interpretation
Based on the derivation when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too. If OBV fails to go past its previous rally high, then this is a negative divergence, suggesting a weak move. The interpretation is based on our understanding that a strong price movement is matched by high volumes.
As the technical indicators takes into account the volume of the securities traded, investors have to be sensitive to announcements on stock splits as they can affect the volume by a large extent.
See Also
- Volume Price Trend (also known as Price Volume Trend)
