On-Balance Volume (OBV)

Definition:

OBV (On-Balance Volume) is a cumulative technical analysis indicator based on trading volume, designed to assess the potential inflow and outflow behavior of \”main funds\” in the market by examining the relationship between price changes and volume. This indicator was proposed by Joseph Granville in 1963 and is a representative tool in the volume-price analysis system.

  1. Calculation Method

The core calculation logic of OBV is the directional accumulation of trading volume:

  • If the current day\’s closing price > previous day\’s closing price, then OBV = previous day\’s OBV + current day\’s volume
  • If the current day\’s closing price < previous day\’s closing price, then OBV = previous day\’s OBV – current day\’s volume
  • If the current day\’s closing price = previous day\’s closing price, then OBV remains unchanged

This indicator is usually presented as a time series, and its trend is more analytically significant than its absolute value.

  1. Technical Characteristics and Functions
  • Proxy Indicator for Fund Movement:

OBV assumes that changes in volume precede price changes. If OBV continues to rise, it indicates a net inflow of funds, potentially signaling subsequent price increases; if OBV continues to fall, it indicates a net outflow of funds, signaling increased price pressure.

  • Trend Confirmation Tool:
  • OBV rising + Price rising: Trend confirmation, funds and price move in the same direction;
  • OBV falling + Price falling: Trend confirmation, bears dominate;
  • OBV diverges from price: Warning signal, a potential trend reversal may occur.
  • Early Signal During Sideways Consolidation:

During price consolidation phases, the trend of OBV can be used to judge the direction of the price breakout after consolidation. If OBV breaks through historical highs/lows in advance, it has forward-looking guiding significance.

  1. Typical Application Scenarios
  • Trend Verification: To determine if a price increase is supported by volume, avoiding false rallies with no volume;
  • Divergence Identification: Used to identify potential turning points during top/bottom dull phases;
  • Combination with Moving Averages: Applying moving average smoothing to the OBV curve (e.g., 10-day, 20-day OBV moving averages) can enhance trend identification capabilities;
  • Use with indicators like MACD, ADX, Bollinger Bands: To construct multi-factor quantitative logic.
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