The On-Balance Volume (OBV) is a cumulative volume-based indicator created by Joe Granville. It measures buying and selling pressure by adding or subtracting volume depending on price movement.
How OBV Works
- If closing price is higher than previous close → that day’s volume is added to OBV
- If closing price is lower than previous close → that day’s volume is subtracted from OBV
- If price is unchanged → OBV remains the same
Formula:
OBV(today) = OBV(previous) + Volume (if close ↑)
OBV(today) = OBV(previous) – Volume (if close ↓)
What OBV Shows
- Rising OBV: Buying pressure → accumulation phase
- Falling OBV: Selling pressure → distribution phase
- Flat OBV: Market indecision, no clear direction
How to Use OBV in Trading
- Trend Confirmation:
If price rises AND OBV rises → strong bullish trend confirmation
If price falls AND OBV falls → strong bearish trend confirmation - Divergences:
- Bullish Divergence: Price makes lower lows, but OBV makes higher lows → hidden accumulation, possible reversal up
- Bearish Divergence: Price makes higher highs, but OBV makes lower highs → distribution, possible reversal down
- Breakouts:
OBV breaking a trendline before price does can act as an early signal
Limitations
- Works best with longer timeframes (1D, 4H)
- False divergences can occur in choppy markets
- Should be combined with other tools (price action, RSI, MACD)