On Balance Volume is a technical indicator which uses volume and price direction as inputs for its calculations. It is one of the older technical indicators, developed in 1965 by Joe Granville when he wrote his book “New Key to Stock Market Profits”. His primary objective was to use it on equities by trying to detect which stocks are being accumulated by investors, and which stock price moves are coming from only small transactions making them less significant. Although over 40 years have passed, we can use it in a Forex market today.
Exact formula to derive On Balance Volume is obtained by adding the present day’s volume to the past cumulative total only if the closing price is up. It is subtracts from the total if the closing price declines.
To put it clearer: Scenario 1 – Closing price of today is greater than yesterday’s =>
On Balance Volume for today = Yesterday’s On Balance Volume + Today’s Volume
Scenario 2 – Closing price of today is smaller than yesterday’s =>
On Balance Volume for today= Yesterday’s On Balance Volume – Today’s Volume
Scenario 3 – Closing price of today is equal to yesterday’s =>
On Balance Volume for today= Yesterday’s On Balance Volume
The general wisdom is to look how well the indicator is raising if the prevailing trend is up, and how well it is declining if the trend is to the down side. We can look at the chart below on EUR/USD currency pair to see how exactly is it behaving in the current market:
It offers different insight into the strength of the move by concentrating on the absolute values of the accumulated volume. The most usefulness it has is in analyzing daily data and longer term patterns. Using it with intra day data can be very misguiding since the volume often oscillates around the day depending on the hour involved with some hours being more heavily traded then others.
Anyone interested in further study of volume can read our previous post about general info on the volume’s subject as well as look at the volume oscillator indicator. Although there are other indicators that facilitate volume as an input material, these two are the most widely accepted and present in almost all charting software.
You Might Want To Check These Out:
- Accumulation/Distribution Indicator
- Hawkeye Heatmap Indicator
- Demo Buffer Pattern – MT5
- Volume Oscillator
- Charting Basics
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