On Balance Volume (OBV) is a technical analysis indicator based on a cumulative total volume relating volume with price change. In 1963 Joseph Granville named “on balance volume” and popularized the technique investigated by Woods and Vignolia in 1940 called “cumulative volume”. The indicator can be used on the market as a whole or on stocks and currencies individually.

The OBV is one of the first and most common indicators to measure positive and negative volume flow detecting the momentum. The indicator is based on the idea that the volume precedes the price.

OBV is easy to calculate adding the period’s volume if the close is up and subtracting the volume of the period if the close is down, the starting point being arbitrary.

OBV (t) = OBV (t-1) + Volume (t)        - if today’s close is up yesterday’s close
OBV (t) = OBV (t-1) - Volume (t)         - if today’s close is down yesterday’s close
OBV (t) = OBV (t-1)                           - if today’s close is equal to yesterday’s close

Where:
OBV (t) - is the indicator value for the current period;
OBV (t-1) - is the indicator value for the previous period;
Volume (t) - is the volume of the current bar.

The general supposition is that OBV indicator chances will precede price changes. A growing volume meaning a rising OBV can suggest the presence of smart money flowing into a currency pair. Other traders will follow and the price is expected to rise.

A bullish (rising) OBV line doubled by a rising price confirms the uptrend of the currency price. In this situation the uptrend is the result of an increased demand so the uptrend is strong. If the price is rising but the volume is decreasing appears a negative divergence (“non-confirmation”) suggesting that the uptrend is weak and will not continue. Another non-confirmation can appear if the price is falling before or without the OBV decreasing. To confirm a downtrend the decline of OBV indicator must be followed by a price fall.

The OBV trend can be broken in two situations: if the trend changes from a falling trend to a rising one or vice versa and if the trend becomes uncertain for more than three days. If the OBV reverses in trend changing to an uptrend or a downtrend a "breakout" takes place.

OBV breakouts usually precede price breakouts so traders should buy long on up breakouts and sell short on down breakouts. The positions should remain open until the trend changes again.