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OBV (On-Balance Volume) is a cumulative volume indicator. It adds volume on up days and subtracts it on down days, showing whether volume supports the price trend.
On-Balance Volume (OBV) is a cumulative volume indicator that adds volume on up days and subtracts volume on down days, creating a running total that theoretically reflects buying and selling pressure. Developed by Joe Granville, OBV's premise is that volume precedes price—smart money accumulates before prices rise and distributes before prices fall.
The calculation:
If today's close > yesterday's close: OBV = Previous OBV + Today's Volume If today's close < yesterday's close: OBV = Previous OBV - Today's Volume If today's close = yesterday's close: OBV = Previous OBV (unchanged)
Interpreting OBV:
<ul>Why OBV matters:
- Volume confirmation: Rising price with rising OBV confirms trend
- Leading indicator: OBV may move before price
- Divergence signals: OBV diverging from price warns of potential reversal
- Breakout validation: Rising OBV supports price breakouts
OBV divergences:
- Bullish divergence: Price lower low, OBV higher low; accumulation despite falling price
- Bearish divergence: Price higher high, OBV lower high; distribution despite rising price
- Significance: Divergences often precede price reversals
Trading applications:
- Trend confirmation: Trade in direction of OBV trend
- Breakout confirmation: OBV should rise with price breakouts
- Range analysis: OBV direction during ranges hints at future direction
- Entry timing: Enter when OBV confirms price move
OBV analysis techniques:
- OBV trend lines: Draw trend lines on OBV for support/resistance
- OBV moving average: Apply moving averages to OBV
- OBV breakouts: OBV breaking trend line often precedes price breakout
Limitations:
- Simplified volume: Treats all volume as either buying or selling
- Gap distortion: Large gaps can skew OBV significantly
- No magnitude: Small price changes get same volume treatment as large
- Cumulative issues: Starting point affects absolute level
OBV remains one of the simplest yet most useful volume indicators. Its ability to reveal accumulation and distribution patterns makes it valuable for confirming trends and identifying potential reversals before they appear in price.