On Balance Volume (OBV) is one of the most respected volume indicators in technical analysis. Developed by Joseph Granville in the 1960s, OBV uses volume flow to predict changes in stock price. In this guide, we will explain how OBV works and how you can use it to improve your trading.
What is On Balance Volume?
On Balance Volume is a cumulative indicator that adds volume on up days and subtracts volume on down days. The theory behind OBV is that volume precedes price. When smart money starts accumulating a stock, volume increases before price rises. When they start distributing, volume increases before price falls.
The OBV Principle: Volume is the fuel that drives price. OBV tracks this fuel by keeping a running total that rises on up days and falls on down days.
How OBV is Calculated
The OBV calculation is straightforward:
- If today's close is higher than yesterday's close: OBV = Previous OBV + Today's Volume
- If today's close is lower than yesterday's close: OBV = Previous OBV - Today's Volume
- If today's close equals yesterday's close: OBV = Previous OBV (no change)
Example Calculation
Starting OBV: 1,000,000
- Day 1: Stock closes up, volume 500,000. New OBV = 1,500,000
- Day 2: Stock closes down, volume 300,000. New OBV = 1,200,000
- Day 3: Stock closes up, volume 400,000. New OBV = 1,600,000
How to Interpret OBV
Trend Confirmation
When OBV is rising along with price, it confirms the uptrend. When OBV is falling along with price, it confirms the downtrend. This alignment tells you that volume supports the current price direction.
OBV Divergence
Divergence between OBV and price is the most powerful signal this indicator provides. Divergence occurs when price and OBV move in opposite directions.
Bullish Divergence
Price makes a lower low, but OBV makes a higher low. This suggests that despite the lower price, buying pressure is actually increasing. A reversal to the upside may be coming.
Bearish Divergence
Price makes a higher high, but OBV makes a lower high. This suggests that despite the higher price, buying pressure is weakening. A reversal to the downside may be coming.
OBV Breakouts
OBV can break out before price does. If OBV breaks above its resistance while price is still consolidating, it often signals that price will soon follow with its own breakout.
OBV Trading Strategies
Strategy 1: OBV Trend Following
Use OBV to confirm trend direction before entering trades.
- Only take long trades when OBV is in an uptrend (making higher highs and higher lows)
- Only take short trades when OBV is in a downtrend (making lower highs and lower lows)
- Add a moving average to OBV for clearer trend identification
Strategy 2: OBV Divergence Trading
Trade divergences between OBV and price for reversal opportunities.
- Look for bullish divergence at support levels for long entries
- Look for bearish divergence at resistance levels for short entries
- Wait for price confirmation before entering (a reversal candle or break of minor trendline)
Strategy 3: OBV Breakout Anticipation
Use OBV breakouts to anticipate price breakouts.
- Watch for OBV to break its trendline before price breaks its pattern
- Position yourself in anticipation of the price breakout
- Use tighter stops since you are entering before confirmation
Combining OBV with Other Indicators
OBV and Moving Averages
Apply a moving average to OBV itself. When OBV crosses above its moving average, it is bullish. When OBV crosses below its moving average, it is bearish. This helps smooth out noise and identify trend changes.
OBV and Price Patterns
Use OBV to validate chart patterns. A head and shoulders pattern with OBV divergence is more reliable than one without. A breakout from a triangle with rising OBV is more likely to succeed.
OBV and Support/Resistance
Check OBV behavior at key price levels. If price tests support with rising OBV, the support is more likely to hold. If price tests resistance with falling OBV, the resistance is more likely to hold.
OBV Limitations
While OBV is powerful, it has some limitations:
- No absolute values: OBV values are relative, so you cannot compare OBV across different stocks
- Gap sensitivity: Large gaps can cause OBV to move dramatically even on low volume
- Lagging nature: Like most indicators, OBV can lag significant moves
- False signals: Not every divergence leads to a reversal
Tips for Using OBV Effectively
- Focus on the trend: The direction of OBV matters more than its absolute value
- Look for divergences: These are the highest-probability signals OBV provides
- Combine with price action: OBV works best when combined with chart patterns and support/resistance
- Use multiple timeframes: Check OBV on higher timeframes for the bigger picture
- Be patient: Wait for confirmation rather than acting on the first sign of divergence
Monitor OBV Across Your Watchlist
Pro Trader Dashboard helps you track volume indicators including OBV across all your positions. Spot divergences early and make better trading decisions.
Summary
On Balance Volume is a time-tested indicator that helps traders understand the relationship between volume and price. By tracking cumulative volume flow, OBV can reveal accumulation and distribution before it shows up in price. Focus on OBV divergences for the highest-probability signals, and always combine OBV with other technical analysis tools for best results.
Want to explore more volume indicators? Check out our guides on Volume Price Analysis and Money Flow Index.