On Balance Volume (OBV) was developed by Joseph Granville. This indicator compares volume to price movements. Final bar volume is positive if the bar close price is higher than the close price of the preceding bar and vice versa. Cumulative value is calculated by adding and deducting volume depending on the movements of the close price.
On Balance Volume (OBV) Indicator
On Balance Volume (OBV) formula:
If the current close price is above the preceding one, then: OBV (i)= OBV (i-l)+VOLUME (i)
If the current close price is below the preceding one, then: OBV (i)= OBV (i-l)- VOLUME (i)
If the current close price is at the same level as the preceding one, then: OBV (i)= OBV (i-l)
Where:
OBV (i) – On Balance Volume (OBV) indicator current value;
OBV (i-l) – On Balance Volume (OBV) indicator value in the preceding period;
VOLUME (i) – current bar volume.
Note that On Balance Volume (OBV) indicator interpretation is based on the direction of the curve not actual values:
If a new price high is confirmed by a new On Balance Volume (OBV) indicator high it means that the bullish trend is strong. If a new price bottom is confirmed by a new On Balance Volume (OBV) indicator bottom it means that the bearish trend is strong. Bullish divergence (bearish convergence) warns of the weakness of the downtrend (uptrend). A breakout of the trend line drawn on the On Balance Volume (OBV) indicator warns of a breakout of the trend line on the price chart. In order to add On Balance Volume (OBV) indicator in MetaTrader 4 use the “Insert -> Indicators -> Volume -> On Balance Volume” menu sequence.
