Understanding On-Balance Volume (OBV)
On-Balance Volume (OBV) is a momentum indicator, compact and bustling like a tiny financial detective that crunches volume trends to preempt stock price movements. Conceived by Joseph Granville and introduced in his 1963 masterwork Granville’s New Key to Stock Market Profits, OBV operates on a crafty premise: volume leads and price follows. According to Granville, this is like estimating the pressure cooker’s whistle even before the steam is visible. Simply put, it’s not about following the money but the noise around it!
Formula for On-Balance Volume (OBV)
Let’s roll up our sleeves and dive into the math:
OBV = Previous OBV + (Current Volume if Close > Previous Close)
- (Current Volume if Close < Previous Close)
OR (0 if Close == Previous Close)
This formula is like a financial scorekeeper that adds up all the positive days and subtracts the negative ones, giving us a sense if the crowd is cheering for the home team (stock goes up) or not.
Calculating On-Balance Volume
On-balance volume plays a Sherlock Holmes, deciphering the tale of trading volumes, either accumulating clues (volumes) when the market is bullish, or dispersing them when bearish:
- If today’s closing price is above yesterday’s, add today’s volume to OBV.
- If it’s below, subtract today’s volume from OBV.
- If unchanged, OBV remains steady, like a stubborn mule refusing to move.
What Does OBV Tell You?
OBV illuminates the dark alleys of market pathways where the big money (institutional investors) sneaks around. As OBV climbs, it whispers tales of potentially forthcoming price increases often before they wave hello. When OBV declines, it signals a possible farewell party to stock prices. Noting divergences between OBV and actual prices can be like spotting a cat in a dog park – something intriguing is definitely going on.
Practical Applications and Warnings
OBV is about joining the conversations the volumes are having, not eavesdropping on individual prices. Invest your time in understanding the trends OBV shows, not the absolute figures. Like trying to understand a politician by their actions rather than their promises.
Related Terms
- Volume: Total amount of stock or securities traded in a given period.
- Momentum Indicators: Tools used by traders to get a measure of an asset’s velocity as well as potential reversal points by calculating the rate of exchange price movement.
- Technical Analysis: A trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity.
Suggested Books for Further Studies
- Granville’s New Key to Stock Market Profits by Joseph Granville
- Technical Analysis of the Financial Markets by John Murphy
- Encyclopedia of Chart Patterns by Thomas N. Bulkowski
OBV isn’t just a number. It’s a lens into the heart of market dynamics, a bridge between silent volumes and vocal prices. Master it, and you might just become the economic whisperer, understanding the softly-spoken language of the stock markets.
