On Balance Volume (OBV)
On Balance Volume Technical Indicator (OBV) is a
momentum technical indicator that relates volume to price change. The
indicator, which Joseph Granville came up with, is pretty simple. When
the security closes higher than the previous close, all of the day’s
volume is considered up-volume. When the security closes lower than the previous close, all of the day’s volume is considered down-volume.
The basic assumption, regarding On Balance Volume
analysis, is that OBV changes precede price changes. The theory is that
smart money can be seen flowing into the security by a rising OBV. When
the public then moves into the security, both the security and the On
Balance Volume will surge ahead.
If the security’s price movement precedes OBV movement, a "non-confirmation" has occurred. Non-confirmations
can occur at bull market tops (when the security rises without, or
before, the OBV) or at bear market bottoms (when the security falls
without, or before, the On Balance Volume Technical Indicator).
The OBV is in a rising trend when each new peak is
higher than the previous peak and each new trough is higher than the
previous trough. Likewise, the On Balance Volume is in a falling trend
when each successive peak is lower than the previous peak and each
successive trough is lower than the previous trough. When the OBV is
moving sideways and is not making successive highs and lows, it is in a
doubtful trend.
Once a trend is established, it remains in force
until it is broken. There are two ways in which the On Balance Volume
trend can be broken. The first occurs when the trend changes from a
rising trend to a falling trend, or from a falling trend to a rising
trend.
The second way the OBV trend can be broken is if the
trend changes to a doubtful trend and remains doubtful for more than
three days. Thus, if the security changes from a rising trend
to a doubtful trend and remains doubtful for only two days before
changing back to a rising trend, the On Balance Volume is considered to
have always been in a rising trend.
When the OBV changes to a rising or falling trend, a
"breakout" has occurred. Since OBV breakouts normally precede price
breakouts, investors should buy long on On Balance Volume upside
breakouts. Likewise, investors should sell short when the OBV makes a
downside breakout. Positions should be held until the trend changes.
Calculation:
If today’s close is greater than yesterday’s close then: OBV(i) = OBV(i-1)+VOLUME(i)
If today’s close is less than yesterday’s close then: OBV(i) = OBV(i-1)-VOLUME(i)
If today’s close is equal to yesterday’s close then: OBV(i) = OBV(i-1)
Where:
OBV(i) — is the indicator value of the current period;
OBV(i-1) — is the indicator value of the previous period;
VOLUME(i) — is the volume of the current bar.
Source Code
Full MQL4 source of On Balance Volume is available in the Code Base: On Balance Volume
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Technical Indicators
