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On Balance Volume
Definition:
On Balance Volume (OBV) relates price to volume, and tries to capture the buying and selling pressure in the market. It assumes that when a security closes up for the day, the number of shares transacted represent buying power. Conversely, the amount of volume on a down day represents selling power.
Therefore, if the price ends up for the day on 10,000 shares traded, OBV's value will increase by 10,000. Should the price decrease on 25,000 shares, OBV's value will decrease by 25,000.
Interpretation:
Proponents of On Balance Volume maintain that trend changes in OBV occur before trend changes in price. Therefore, if OBV is going down over time while price is increasing, a price collapse is possible. If OBV is trending up while price is trending down, the security could be heading for an upswing in price.
