What Is “On-Balance Volume”?

On-Balance Volume keeps a running total of volume flowing into or out of a security. When the security closes higher than the previous close, all of the day’s volume is considered up-volume. A close lower than the previous day’s results in all of the day’s volume considered down-volume. A rising OBV is defined as a sign of smart money flowing into a security. As the public then moves into the security, both the security and the OBV will surge ahead. If price movement precedes OBV movement, it is called a “non-confirmation.” Non-confirmations can occur at bull market tops, when the security rises before/without the OBV or at bear market bottoms when the security falls before/without the OBV.

When the security’s price closes up, the day’s OBV is created by adding the day’s volume to the cumulative total. Subtract the day’s volume from the cumulative total when the price closes down.

Look for rising trends (when each new peak is higher than the previous peak and each new trough is higher than the previous trough) or falling trends (when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough) to signal a “breakout.” OBV breakouts normally precede price breakouts and investors should buy long on OBV upside breakouts and sell short when on OBV downside breakouts. An OBV is moving sideways is in a doubtful trend and implies a hold until the trend changes.

It is the direction of the OBV line (its trend) that is important and not the actual numbers themselves as actual values will differ depending on how far back you are charting.

Source: TD Ameritrade