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On-Balance Volume: The Way to Smart Money

By

澳洲幸运5官方开奖结果体彩网:The Investopedia Team

Updated December 29, 2024

Reviewed by

Toby Walters

Fact checked by

Michael Rosenston

What Is On-Balance Volume?

On-balance volume (OBV), a momentum indicator that measures positive and negative volume flow, was developed by Joseph Granville and introduced in 1963 to the technical community inside the pages of his book, "Granville's New Key to Stock Market Profits."

Granville felt that volume was the driving force behind the markets, and designed OBV to project when major moves in the markets would occur. In his book, he described the increase or decrease of his indicator, setting new highs or lows, as "a spring being wound tightly."

Key Takeaways

On-balance volume (OBV) is a momentum indicator that measures positive and negative volume flow.
Introduced in 1963, the concept of on-balance volume was developed by noted analyst and financial writer Joseph Granville.
The theory posits that when volume increases or decreases dramatically, without significant change in an issue's price, at some point the price "springs" upward or downward.

Understanding On-Balance Volume

Granville went on to explain his theory by stating that when volume increased or decreased dramatically without any significant change in the issue's price, then at some point the price would "spring" upward or downward. It appears that as institutions (pension funds, 澳洲幸运5官方开奖结果体彩网:investment funds, and large trading houses) begin to buy into an issue that 澳洲幸运5官方开奖结果体彩网:retail investors are still selling, volume increases as the price is still slightly ♌fal🅘ling or leveling out.

Over a period of time, volume begins to drive the price upward and the converse then begi☂ns to take over as the institutions begin to sell their position and the retail investors begin again to accumulate their positions.

Important

For analysis purposes, the exact value of the on-balance volume is unimportant. What matters is the direction it's moving in: up or down.

Smart Money

The term "smart money" begins to appear crystal clear—the institutions are buying the stock of the "average Joe" at the bottom and then selling it back to him at or near the top. You can also see how OBV can suggest major 澳洲幸运5官方开奖结果体彩网:trendline turnarounds.
Here is an easy formula explaining OBV:

If today's close is greater than yesterday's close, then today's volume is added to yesterday's OBV, and is considered 澳洲幸运5官方开奖结果体彩网:up volume.
If today's close is less than yesterday's close, then today's volume is subtracted from yesterday's OBV and it is considered 澳洲幸运5官方开奖结果体彩网:down volume.
And if today's close is equal to yesterday's close then today's OBV is equal to yesterday's OBV.

Example of On-Balance Volume

The relationship between price and on-balance volume is evident in the following chart of the Dow Jones Industrial Index from December 2000 to October 2001. The upward trends of the two metrics were reversed abruptly and with conviction, as the turmoil of the political and corporate environment led the news headlines that year.

Figure 1: On-Balance Volume

What Does the Volume of a Stock Tell You?

The volume of a stock is the number of shares that are traded over a specific period, usually a trading day. Stocks with high volume tend to have higher liquidity and a more active market. If a stock has low volume, it might be difficult to sell a large number of shares without 澳洲幸运5官方开奖结果体彩网:price slippage.

What Does It Mean If Trading Volume Increases?

In technical analysis, a sudden change in trading volume can be seen as confirmation of a market movement. A price swing accompanied by a large increase in volume can be a sign that market sentiment is chang♍ing in favor of the price move. A move with low volume can be a sign th🌠at the market is not confident in the price swing.

How Do You Read On-Balance Volume?

On-balance volume is a way of comparing the pressure between buyers and sellers of a stock. It is measured by adding the trading volume on days when the price goes up, and subtracting the volume from days when the price goes down. The exact value of on-balance volume is less important than knowing whether it is trending up or down.

The Bottom Line

On-balance volume is one of several indicators used to gauge the strength of market price movements. By adding together positive and negative vol𝄹ume flows, traders can get a stronger idea of whether money iꦬs entering or leaving a market. As with other forms of technical analysis, it is important to compare other metrics rather than rely on a single indicator.

Article Sources

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