StockSignal
On-Balance Volume (OBV) cumulatively adds volume on up periods and subtracts it on down periods to track buying or selling pressure.
Where it fits
On-Balance Volume (OBV)→Trading ActivityTrading activity measures the level of buying and selling in a stock, typically expressed through volume metrics that indicate liquidity and investor interest.
On-Balance Volume (OBV) cumulatively adds volume on up periods and subtracts it on down periods to track buying or selling pressure.
The calculation:
If Close > Previous Close: OBV = Previous OBV + Volume If Close < Previous Close: OBV = Previous OBV - Volume If Close = Previous Close: OBV = Previous OBV
What OBV measures:
- Accumulation: Rising OBV indicates buyers are active
- Distribution: Falling OBV indicates sellers are active
- Money flow: Volume-based proxy for institutional activity
- Confirmation: Should confirm price trends
Trading applications:
- Trend confirmation: Rising prices with rising OBV confirms uptrend
- Divergence signals: Price/OBV divergences can warn of reversals
- Breakout validation: Volume expansion on breakouts strengthens signal
- Accumulation detection: Rising OBV in flat market may precede rally
Key divergences:
- Bullish divergence: Price makes lower low, OBV makes higher low
- Bearish divergence: Price makes higher high, OBV makes lower high
Limitations:
- Absolute level meaningless: Only the direction and pattern matter
- Gap effects: Gaps can distort the OBV calculation
- No volume quality: Treats all volume equally regardless of price level
OBV is one of the oldest volume indicators and remains widely used for confirming price trends and detecting potential reversals.