On Balance Volume

What

OBV is a technical analysis indicator intended to relate price & volume in the stock market. OBV is based on the cumulative total volume. Volume on a day with a higher close is added, & volume on a day with a lower close is subtracted.

How

If close is greater than previous close: OBV = OBV (previous) + volume today

If close is less than previous close: OBV = OBV (previous) – volume today

If close is equal: OBV = OBV (previous)

Only the shape of the resulting indicator is used, not the actual number.

When

OBV is generally used to confirm price moves. The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend more volume on up days than down days. So where prices are going up, OBV should be going up as well, and when prices make new rally highs, OBV should too. If OBV fails to go past its previous rally high then this is a negative divergence, suggesting a weak move.