Just like William %R and Stochastic indicators, On Balance Volume (OBV) is a momentum indicator that uses volume to forecast changes in stock price. OBV is based on the premise that sharp volume increase without corresponding change in stock price will eventually lead to price jump and vice versa.
OBV is a running total of positive and negative volume of a security. A period’s volume is positive when the current price close is above previous price close of the security. A period’s volume is negative when the current close is below the security’s previous close.
OBV moves up when volume on price up days outpaces volumes on price down days. OBV falls when volume on price down days outpaces volume on price up days. In the above table, the cumulative volume on down days is 13,83,416 whereas on up days the cumulative volume is 11,50,288, hence the OBV number is negative.
Percentage change in OBV volume is calculated as the percentage difference in OBV over a 1 week period. So if the current OBV number is 100 and the OBV 1 week ago was 85, percentage change in OBV is (100/85) – 1 = 17.64%.
A positive percentage change in OBV accompanied by positive price change is a signal of strong upward price momentum. But a positive percentage change in OBV accompanied by a flat or small downward moving price signals that a price reversal might be coming.
Similarly, a negative percentage change in OBV accompanied with negative price change indicates strong downward momentum. But a negative percentage change in OBV accompanied by a flat or small upward price momentum signals that a price reversal might be coming.