On Balance Volume

On balance volume displays volume as a line which increases and decreases based on price interactions with volume. The line increases on days where price closes higher than its opening by adding volume to the previous value. The line decreases on days where price closed lower than its opening by subtracting volume from its previous value. In this sense, the line attempts to more accurately attribute volume to price increases or decreases. Additionally, changes in the On Balance Volume line often occur before a change in the price level.

A problem occurs in the methodology of assigning all volume for a day to positive or negative volume. It isn’t completely realistic to represent all of the day’s volume was a positive or a negative number, even if it occurred on days where price trends increased or decreased.

On Balance Volume should breakout upwards before price trends upwards, and should breakout downwards before price falls. Rising trends in the On Balance Line should have rising peaks and troughs. Falling trends in the On Balance Line should have falling peaks and troughs.