On Balance Volume Study

On Balance Volume Study (OBV)

Discuss the balance volume study (OBV) in Thinkorswim (TOS). Joe Granville introduced the OBV in his 1963 book, Granville’s New Key to Stock Market Profits. It was one of the first indicators to measure positive and negative volume flow. The OBV study was developed to determine when price action and volume divergence occurred. Granville suggested in his book that moves in volume come before moves in price.

On Balance Volume Price Move

The on balance volume study finds a rising slope when the volume from the up days is greater than the volume from the down days, while the OBV finds a falling slope when the volume from the down days is greater than the volume from the up days.

Volume flow is a great way to identify money moving into or out of a stock. Chartists can look for divergences between the on-balance volume study and price to predict price movements or use the on balance volume to confirm price trends.

Pause here to think this through. A small candle (perhaps a spinning top or long wick doji) may offer a small amount of positive volume (which would only move the OBV line a small distance). In contrast, the candle before and after may be large body and present lots of negative volume, which would move the OBV at a much longer distance.

Granville

Granville noted that the on-balance volume study would often move before prices. He discussed volume pressure in his book, suggesting that a rising on-balance volume would signal buying pressure “pushing up” on prices that were flat or moving down and that a falling OBV would signal selling pressure “pushing down” on prices that are flat or moving upwards.

Using trend lines, these differences are easier to spot. With the OBV, volume is added or subtracted at the close of the candle, so the trend lines should always be drawn against the close of the candle body, not against the wicks or the candle’s opening.

OBV Flatline

On Balance Volume Study Divergence

These differences in direction are called divergence, and before we go any further, we will look at the word divergence to better understand its meaning. On Investopedia, there is a great definition of divergence. What is Divergence?

The divergence occurs when the stock price and volume move in opposite directions or when the price move is not as great as the volume on a chart. Divergence can be an indication of an imminent positive or negative price move. Divergence is one of the most complex signals and one that can give less experienced investors false signals.

The most common way to identify divergence with the on-balance volume study is by using trendlines to distinguish when:

  • the OBV is making a lower low (Steep Downslope) or higher low (Less Steep Downslope) while price action fails to make the same
  • the on balance volume is making a lower high (Low Volume) or higher high (High Volume), while price action fails to make the same
  • price is making a lower low or higher low while on balance volume study fails to make the same
  • price makes a lower or higher high, while OBV fails to make the same.
On Balance Volume Divergence

Here is an example of trend lines showing divergence between the OBV and price action.

OBV Divergence Example

Draw trend lines from the candle close, not from the candle wicks or candle open. Look at the on balance volume direction, not at the OBV number. Slope and direction are important, not the OBV total. Moves in volume come before moves in price. The on balance volume study should confirm price action or point out when to ignore the current price action.

How Do You Calculate On Balance Volume?

  1. Here’s how you calculate On Balance Volume:
  2. If the closing price is above the prior close price, then:
  3. Current OBV = Previous OBV + Current Volume
  4. If the closing price is below the prior close price, then:
  5. Current OBV = Previous OBV – Current Volume
  6. If the closing prices equal the prior close price, then:
  7. Current OBV = Previous OBV (no change)
  8. The mathematical formula for the OBV study is basic addition or subtraction. 

Study and Specialization

On balance, volume is a very simple indicator with powerful signals, but finding those signals can take some time. By adding a few changes to the regular OBV study found in TOS, we can identify when those signals are present and snap some trend lines onto the chart for confirmation.

SMA Crossup

http://tos.mx/4SKAro TOS link for my on balance volume study

Look at the changes made to the on balance volume study. First, I have added a Simple Moving Average to the OBV Study to identify when the on balance volume is above or below average.

Next, I have added a red dot for bearish divergence and a green dot for bullish divergence. On the green candle highlighted below, the candle closed much higher than the previous candle close, while the OBV signaled a very small volume gain.

This low volume confirmation signaled that new money was not supporting this higher move. I also have added labels and alerts that pop up when the OBV gives signals to which a trader should pay attention.

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Crosses

If the on balance volume crosses above or below the OBV Moving Average or if there is Positive or Negative Divergence. As a final touch, I have added a change to the price of candles when there is a divergence between the on-balance volume study and price action.

Recommendations: Once a divergence dot appears, snap a flat line onto the on balance volume study and the chart. Draw out trend lines looking for confirmation of the signal. Spotting divergence is difficult, even for experienced traders. The Red and Green Dots will help signal that something is ‘off,’ and a second look should be given.

In the picture below, the OBV crosses below the Moving Average a few bars sooner than the price crosses down below its moving average. Also, notice that the OBV remains sloped down, staying below the moving average and giving no indication of a reversal.

Price action showed indecision and crossed above the moving average before crossing below the average and moving lower. The OBV would keep a trader out of this trade, perhaps avoiding the price crossover signal.

Crossdown
On Balance Volume Signals
OBV Signals Examples
OBV Customizing
On Balance Volume Study
Chart Example
On Balance Volume Distance
Close Between Candles

Final Thoughts: On Balance Volume Study

The on balance volume study is a great technical tool to confirm volume and price for buying and selling pressure. This momentum indicator can be a great help when placing trades. Whether you are a day trader or a swing trader doesn’t matter. The OBV indicator is extremely helpful.

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