science

On-balance volume

On-balance volume is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand On-balance volume rather than just read about it. In short: On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.

Key takeaways

On-balance volume belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect On-balance volume to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of On-balance volume from memory before moving on to harder problems.

Reference excerpt

On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.

The formula

O B V = O B V p r e v + { v o l u m e i f c l o s e > c l o s e p r e v 0 i f c l o s e = c l o s e p r e v − v o l u m e i f c l o s e < c l o s e p r e v {\displaystyle OBV=OBV_{prev}+\left\{{\begin{matrix}volume&\mathrm {if} \ close>close_{prev}\\0&\mathrm {if} \ close=close_{prev}\\-volume&\mathrm {if} \ close<close_{prev}\end{matrix}}\right.}

Because OBV is a cumulative result, the value of OBV depends upon the starting point of the calculation.

Application Total volume for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value. So, when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too. If OBV fails to go past its previous rally high, then this is a negative divergence, suggesting a weak move. The technique, originally called "continuous volume" by Woods and Vignola, was later named "on-balance volume" by Joseph Granville who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits. The index can be applied to stocks individually based upon their daily up or down close, or to the market as a whole, using breadth of market data, i.e. the advance/decline ratio. OBV is generally used to confirm price moves. The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend there is more volume on up days than down days.

Similar indicators Other price × volume indicators:

Money flow Price and volume trend Accumulation/distribution index

See also Dimensional analysis — explains why volume and price are multiplied (not divided) in such indicators

References

External links Investopedia Definition, On-Balance Volume Indicator

Worked examples

Example 1 — a first encounter with On-balance volume

Start with the simplest possible case. Write down what On-balance volume claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to On-balance volume before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about On-balance volume ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of On-balance volume

In research: On-balance volume appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses On-balance volume in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: On-balance volume is common in secondary-school and first-year university syllabi. It links to neighbouring topics Technical indicators, so understanding it makes those chapters shorter.
In everyday life: Look for On-balance volume outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study On-balance volume in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what On-balance volume means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain On-balance volume out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is On-balance volume in simple terms?

On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.

Why does On-balance volume matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study On-balance volume?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on On-balance volume.