This was one of the first and most popular indicators to measure positive and negative volume flow. On Balance Volume line is relatively easy to construct. We first start with a beginning number. It should be relatively high e.g. 50,000. Then, on day one, if the close is positive, that day's volume is added to the 50,000. If the day's close was lower, the volume is subtracted. So on up days, volume is added. And on down days, the volume is subtracted. The result is a fluctuating line. The value of the On Balance Volume is that it generally is a precursor to a change in trend. The holding is that smart money leaves a security first when it is near a top; and also that the smart money is buying when a security is near a low.
OBV is a volume indicator and is, therefore, only used on futures contracts. Joseph Granville developed it in 1963. It assigns the volume for each day a positive or negative value depending on whether the market prices close higher or lower for that day. A higher close from the previous day results in the volume figure for the current day being assigned a plus value, while a lower close from the previous day assigns a negative value. A running cumulative total is then maintained as the market continues to trade. It is the direction of the OBV line that is important and not the actual numbers.