Definition, Elements, and Uses as Indicator

What Is On-Balance Amount (OBV)?

On-balance amount (OBV) is a technical purchasing and promoting momentum indicator that uses amount waft to predict changes in stock price. Joseph Granville first developed the OBV metric inside the 1963 e book Granville’s New Key to Stock Market Income.

Granville believed that amount was the essential factor drive at the back of markets and designed OBV to project when major moves inside the markets would occur in keeping with amount changes. In his e book, he described the predictions generated by means of OBV as “a spring being wound tightly.” He believed that when amount will build up sharply and not using a essential change inside the stock’s price, the price will after all soar upward or fall downward.

The Elements for OBV Is


$\begin{array}{cc}& \text{OBV}={\text{OBV}}_{prev}+\{\begin{array}{cc}\text{amount,}& \text{if close}>{\text{close}}_{prev}\\ \text{0,}& \text{if close}={\text{close}}_{prev}\\ -\text{amount,}& \text{if close}<{\text{close}}_{prev}\end{array}\\ & \text{where:}\\ & \text{OBV}=\text{Provide on-balance amount level}\\ & {\text{OBV}}_{prev}=\text{Previous on-balance amount level}\\ & \text{amount}=\text{Latest purchasing and promoting amount amount}\end{array}$

get started{aligned} &text{OBV} = text{OBV}_{prev} + get started{instances} text{amount,} & text{if close} > text{close}_{prev} text{0,} & text{if close} = text{close}_{prev} -text{amount,} & text{if close} < text{close}_{prev} end{instances} &textbf{where:} &text{OBV} = text{Provide on-balance amount level} &text{OBV}_{prev} = text{Previous on-balance amount level} &text{amount} = text{Latest purchasing and promoting amount amount} end{aligned} ​OBV=OBVprev​+⎩⎪⎨⎪⎧​amount,0,−amount,​if close>closeprev​if close=closeprev​if close<closeprev​​where:OBV=Provide on-balance amount levelOBVprev​=Previous on-balance amount levelamount=Latest purchasing and promoting amount amount​

Calculating OBV

On-balance amount provides a operating normal of an asset’s purchasing and promoting amount and indicates whether or not or no longer this amount is flowing in or out of a given protection or overseas cash pair. The OBV is a cumulative normal of amount (certain and destructive). There are 3 rules performed when calculating the OBV. They are:

1. If in recent years’s ultimate price is higher than the day gone by’s ultimate price, then: Provide OBV = Previous OBV + in recent years’s amount

2. If in recent years’s ultimate price isn’t as much as the day gone by’s ultimate price, then: Provide OBV = Previous OBV – in recent years’s amount

3. If in recent years’s ultimate price equals the day gone by’s ultimate price, then: Provide OBV = Previous OBV

What Does On-Balance Amount Tell You?

The theory at the back of OBV is in keeping with the respect between smart money – particularly, institutional investors – and no more subtle retail investors. As mutual finances and pension finances get started to buy into a subject matter that retail investors are selling, amount would perhaps increase while the price remains somewhat level. One day, amount drives the price upward. At the moment, higher investors begin to advertise, and smaller investors get started buying.

Despite being plotted on a price chart and measured numerically, the real particular person quantitative price of OBV is not similar. The indicator itself is cumulative, while the time frame remains mounted by means of a faithful starting point, this means that the real amount price of OBV arbitrarily depends on the start date. Instead, buyers and analysts look to the nature of OBV movements over time; the slope of the OBV line carries the entire weight of study.

Analysts look to amount numbers on the OBV to track large, institutional investors. They maintain divergences between amount and worth as a synonym of the relationship between “smart money” and the disparate lots, hoping to blow their own horns possible choices for buying towards incorrect prevailing characteristics. For instance, institutional money would perhaps energy up the price of an asset, then advertise after other investors soar on the bandwagon.

Example of Tips on how to Use On-Balance Amount

Underneath is a listing of 10 days’ value of a hypothetical stock’s ultimate price and amount:

1. Day one: ultimate price equals $10, amount equals 25,200 shares
2. Day two: ultimate price equals $10.15, amount equals 30,000 shares
3. Day 3: ultimate price equals $10.17, amount equals 25,600 shares
4. Day 4: ultimate price equals $10.13, amount equals 32,000 shares
5. Day 5: ultimate price equals $10.11, amount equals 23,000 shares
6. Day six: ultimate price equals $10.15, amount equals 40,000 shares
7. Day seven: ultimate price equals $10.20, amount equals 36,000 shares
8. Day 8: ultimate price equals $10.20, amount equals 20,500 shares
9. Day 9: ultimate price equals $10.22, amount equals 23,000 shares
10. Day 10: ultimate price equals $10.21, amount equals 27,500 shares

As can be noticed, days two, 3, six, seven and 9 are up days, so the ones purchasing and promoting volumes are added to the OBV. Days 4, 5 and 10 are down days, so the ones purchasing and promoting volumes are subtracted from the OBV. On day 8, no changes are made to the OBV for the reason that ultimate price did not change. Given the days, the OBV for every of the 10 days is:

1. Day one OBV = 0
2. Day two OBV = 0 + 30,000 = 30,000
3. Day 3 OBV = 30,000 + 25,600 = 55,600
4. Day 4 OBV = 55,600 – 32,000 = 23,600
5. Day 5 OBV = 23,600 – 23,000 = 600
6. Day six OBV = 600 + 40,000 = 40,600
7. Day seven OBV = 40,600 + 36,000 = 76,600
8. Day 8 OBV = 76,600
9. Day 9 OBV = 76,600 + 23,000 = 99,600
10. Day 10 OBV = 99,600 – 27,500 = 72,100

The Difference Between OBV and Accumulation/Distribution

On-balance amount and the accumulation/distribution line are similar in that they are every momentum indicators that use amount to predict the movement of “smart money”. On the other hand, that’s the position the similarities end. In the case of on-balance amount, it is calculated by means of summing the amount on an up-day and subtracting the amount on a down-day.

The process used to create the accumulation/distribution (Acc/Dist) line is quite rather then the OBV confirmed above. The process for the Acc/Dist, without getting too refined, is that it uses the positioning of the current price relative to its contemporary purchasing and promoting range and multiplies it by means of that period’s amount.

Limitations of OBV

One limitation of OBV is that this is a major indicator, this means that that it will produce predictions, alternatively there may be little it is going to say about what has in fact took place in the case of the symptoms it produces. Because of this, it is liable to produce false signs. It might be able to because of this truth be balanced by means of lagging indicators. Add a transferring reasonable line to the OBV to seek for OBV line breakouts; you’ll be able to verify a breakout in the price if the OBV indicator makes a concurrent breakout.

Some other apply of caution in the use of the OBV is that a large spike in amount on a single day can throw off the indicator for quite a while. For instance, a surprise income announcement, being added or removed from an index, or large institutional block trades might reason the indicator to spike or plummet, alternatively the spike in amount will not be indicative of a building.