On Balance Volume was developed by Joe Granville. See his book New Strategy of Daily Stock Market Timing for Maximum Profits for more detailed information.
It is the direction of the OBV line (its trend) that is important and not the actual numbers themselves. The actual OBV values will differ depending on how far back you chart.
The OBV line should follow in the same direction as the price trend. If prices are in an uptrend, the OBV line should do the same. If prices are trending lower, the OBV line should do the same. If the OBV line shows a divergence from the price trend, you have a warning of a possible trend reversal. OBV changes usually precede price changes.
OBV shows if volume is flowing into or out of a security, or the buying and selling pressure. When there's strong and increasing buying pressure, the price is almost certain to continue going up. The theory is that money from knowledgeable traders, or "smart money," can be seen flowing into the security by a rising OBV. When the public then moves into the security, both the security and the OBV will surge ahead.
Also watch for OBV line breakouts, when the OBV breaks its established trend (see Breakout Signals). Since OBV breakouts normally precede price breakouts, an OBV upside breakout is a buy signal. Likewise, an OBV downside breakout is a sell signal.
On Balance Volume is well-suited to trading short-term cycles, however, Granville advises that investors must act quickly and decisively if they wish to profit from short-term OBV analysis. Traders also recommend that the daily, weekly and monthly charts should be consulted for OBV to confirm the buy and sell signals. Signals OBV offers the following signals:
