Calculation

• OBV is a cumulative total of volume additions and subtractions.
• OBV adds a period’s volume to a cumulative total when the close of the price is up.
• OBV subtracts a period’s volume from the cumulative total if the price closed down.
• The beginning of the graph starts at 0 with the first candle. It accumulates from the start of the graph. This is an important aspect because the numbers do not work in a relative sense and are not very meaningful. It is useless to compare the measures to other pairs or even within the same currency pair for different time periods. What’s important is the shape and direction of the OBV line.
• OBV is compared to the price to look for divergence or confirmation.

Form

On Balance Volume forms in zigzag patterns that have trending characteristics.

• During a sideways trend: Trend is doubtful. OBV moves sideways. (See 1 in fig. 1)
• During a downtrend OBV forms lower highs, and lower lows. (See 2 in fig. 1)
• During an uptrend OBV forms higher highs, and higher lows. (See 3 in fig. 1)

An Example

Let’s say that the EUR/USD pair goes from 1.2500 to 1.2600 on 10,000 volume and the next day price goes from that new 1.2600 back to 1.2500 on 5,000 volume. Even though price is the same after the two sessions OBV would go up because there was more volume on the up day than the down day. Several of these types of sessions in a row may seem like a flat or sideways moving price line but OBV would be on the rise. Therefore there is more pressure for the Euro to rise as a result. That rise will happen when Euro bulls finally get control of the pair’s direction.

Use

On Balance Volume is used for 4 things:

• Confirm price movements.
• Look for bullish or bearish divergences.
• Swing traders can use trendlines and moving averages to predict changes in short term trends as OBV can act as a leading indicator.
• OBV can also help spot breakouts. If OBV breaks to new high, but price is below previous high, probability is that prices will follow. 

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