On-Balance Volume (OBV) is one of the oldest and most reliable volume-based indicators in technical analysis. Developed by Joe Granville in 1963, OBV uses volume flow to predict changes in stock price. The core concept is simple but powerful: volume precedes price. By tracking cumulative volume, OBV helps traders spot accumulation and distribution before the price moves.
What is On-Balance Volume?
OBV is a cumulative indicator that adds volume on up days and subtracts volume on down days. The result is a running total that shows whether volume is flowing into or out of a security. When OBV rises, it suggests buying pressure (accumulation). When OBV falls, it suggests selling pressure (distribution).
Key insight: The actual OBV number does not matter. What matters is the direction and shape of the OBV line. A rising OBV suggests smart money is accumulating shares; a falling OBV suggests distribution.
How OBV is Calculated
The OBV calculation follows a simple rule-based approach:
OBV Calculation Rules
- 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)
The result is a running total that moves with price direction, weighted by volume.
Interpreting OBV Signals
OBV provides several types of signals that traders use to make decisions:
1. OBV Trend
The simplest interpretation looks at the OBV trend:
- Rising OBV: Buying pressure is dominant - bullish for price
- Falling OBV: Selling pressure is dominant - bearish for price
- Flat OBV: No clear accumulation or distribution
2. OBV Divergences
Divergences between price and OBV often signal potential trend reversals:
- Bullish divergence: Price makes lower lows while OBV makes higher lows - accumulation despite falling prices
- Bearish divergence: Price makes higher highs while OBV makes lower highs - distribution despite rising prices
3. OBV Breakouts
OBV can sometimes break out before price does:
- OBV breaking to new highs while price lags suggests upcoming price breakout
- OBV breaking down while price holds suggests potential price breakdown
OBV Trading Strategies
Strategy 1: Trend Confirmation
Use OBV to confirm price trends and filter false signals:
- In an uptrend, OBV should be making higher highs and higher lows
- In a downtrend, OBV should be making lower highs and lower lows
- If price is rising but OBV is flat or falling, be cautious of trend failure
Trend Confirmation Example
Stock ABC breaks above resistance at $50:
- Price: Breaks to new 52-week high
- OBV: Also breaking to new highs
- Conclusion: Volume confirms the breakout - likely to continue higher
Compare to a breakout where OBV is flat or declining - higher chance of failure.
Strategy 2: Divergence Trading
Trade divergences between OBV and price for reversal opportunities:
- Look for bullish divergence near support levels for long entries
- Look for bearish divergence near resistance levels for short entries or exits
- Wait for price confirmation (reversal candle, trendline break) before entering
Strategy 3: OBV Moving Average
Apply a moving average to OBV for clearer signals:
- OBV crossing above its moving average suggests bullish momentum
- OBV crossing below its moving average suggests bearish momentum
- Common moving average periods are 20 or 50 days
Combining OBV with Other Indicators
OBV works best when combined with other technical tools:
- Price patterns: Use OBV to confirm breakouts from chart patterns
- Moving averages: Combine OBV trend with price moving average signals
- RSI: Look for alignment between OBV divergences and RSI signals
- Support/resistance: Check OBV behavior at key price levels
OBV vs Other Volume Indicators
Understanding how OBV differs from other volume tools:
- Volume bars: Show individual day volume; OBV shows cumulative trend
- Accumulation/Distribution: Uses intraday price position; OBV uses only closing direction
- Volume Moving Average: Shows average volume; OBV shows volume direction
- Money Flow Index: Bounded oscillator; OBV is unbounded cumulative
Advantages of OBV
OBV offers several benefits for traders:
- Simplicity: Easy to calculate and interpret
- Leading indicator: Volume often moves before price
- Trend confirmation: Validates price movements with volume
- Divergence detection: Spots potential reversals early
Limitations of OBV
Be aware of these OBV limitations:
- All-or-nothing approach: Assigns entire volume to one direction based only on close
- Gap sensitivity: Large gaps can distort the OBV line
- Requires context: OBV alone is not enough for trading decisions
- Not for all markets: Works best on stocks with significant volume
Common OBV Mistakes to Avoid
- Focusing on the number: The absolute OBV value is meaningless - focus on the trend
- Ignoring timeframe: OBV signals work better on daily charts than intraday
- Trading every divergence: Wait for price confirmation before acting
- Using on low-volume stocks: OBV is unreliable when volume is thin
Track Your Volume-Based Trades
Pro Trader Dashboard helps you analyze your trading performance across different strategies. See how your OBV-based trades perform and refine your approach.
Summary
On-Balance Volume is a time-tested indicator that helps traders understand the relationship between volume and price movement. By tracking cumulative volume flow, OBV reveals whether smart money is accumulating or distributing shares. Use it to confirm trends, spot divergences, and validate breakouts. Remember that OBV works best on liquid stocks with meaningful volume and should be combined with other technical analysis tools.
Want to learn more about volume analysis? Check out our guide on volume analysis in trading or explore accumulation/distribution patterns.