Series 31: On-Balance Volume (OBV)

On-Balance Volume (OBV) is a technical indicator used to measure the flow of volume of a security. It helps traders assess the strength of a trend by analyzing the relationship between price movement and volume. Unlike price-based indicators, OBV focuses on volume to provide insights into the buying and selling pressure in the market. It is particularly useful for identifying potential trend reversals, confirming trends, and spotting divergences between price and volume.

How is the OBV Calculated?

The OBV is calculated by adding or subtracting the daily trading volume based on whether the closing price of the security is higher or lower than the previous day's closing price. The OBV is a cumulative indicator, meaning it builds on the previous day's OBV value.

Formula:>

• ● If the current closing price is higher than the previous closing price:OBV=Previous OBV + Current Volume
• ● If the current closing price is lower than the previous closing price:OBV=Previous OBV − Current Volume
• ● If the current closing price is equal to the previous closing price:OBV=Previous OBV

Example: Reliance Industries
Assume the following:

• ● Previous OBV = 1,000,000
• ● Current Closing Price = ₹2500
• ● Previous Closing Price = ₹2470
• ● Current Volume = 200,000 shares

Calculate OBV
Since the Current Closing Price (₹2500) is higher than the Previous Closing Price (₹2470):
OBV = Previous OBV + Current Volume
OBV=1,000,000+200,000
OBV=1,200,000
If the closing price had been lower, the volume would have been subtracted instead.

How to Interpret the OBV?
Trend Confirmation:

• ● Rising OBV: Indicates that buying pressure is increasing, which may confirm an uptrend.
• ● Falling OBV: Indicates that selling pressure is increasing, which may confirm a downtrend.

Key Points to Remember:

• ● OBV measures volume flow, not price direction.
• ● OBV is often used in conjunction with other indicators or chart patterns to confirm signals.
• ● Divergences between OBV and price can provide early warnings of potential trend reversals.

OBV values are cumulative and relative, so the absolute value of OBV is not as important as its trend or direction.

Disclaimer: This information is for educational purposes only. Consult a financial advisor before engaging in such trading activities.

Axis Direct Disclaimer This is for educational purposes only. Axis Direct is a brand under which Axis Securities Limited offers its. Retail broking and investment services. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Disclaimer & Statutory Information