On Balance Volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price. Developed by Joe Granville in the 1960s, OBV is based on the idea that volume precedes price movement. By tracking the cumulative flow of volume, OBV helps traders identify whether money is flowing into or out of a security.
What is OBV?
OBV is a cumulative indicator that adds volume on up days and subtracts volume on down days. The theory is that when volume increases without a significant price change, the price will eventually move up (for positive volume) or down (for negative volume).
Key concept: OBV measures buying and selling pressure. If OBV is rising, buyers are willing to step in and drive volume on up days. If OBV is falling, sellers are in control. The actual OBV number matters less than its direction.
How OBV is Calculated
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)
OBV Calculation Example
Day 1: Close $50, Volume 1M, OBV starts at 0
Day 2: Close $51 (up), Volume 1.5M, OBV = 0 + 1.5M = 1.5M
Day 3: Close $50.50 (down), Volume 1M, OBV = 1.5M - 1M = 0.5M
Day 4: Close $52 (up), Volume 2M, OBV = 0.5M + 2M = 2.5M
How to Interpret OBV
OBV Direction
- Rising OBV: Accumulation - buying pressure dominates
- Falling OBV: Distribution - selling pressure dominates
- Flat OBV: No clear dominance, possible consolidation
OBV Trend Confirmation
- Price rising + OBV rising = Confirmed uptrend (healthy)
- Price falling + OBV falling = Confirmed downtrend (healthy)
- Price rising + OBV falling = Potential warning (distribution)
- Price falling + OBV rising = Potential warning (accumulation)
OBV Trading Strategies
1. OBV Divergence
Divergence between price and OBV is one of the most powerful signals:
- Bullish divergence: Price makes lower low, OBV makes higher low. Suggests accumulation and potential upside.
- Bearish divergence: Price makes higher high, OBV makes lower high. Suggests distribution and potential downside.
Bearish Divergence Example
Stock rallies from $40 to $50, OBV rises to 10M.
Stock pulls back to $45, OBV drops to 8M.
Stock rallies again to $52 (new high).
OBV only rises to 9M (below previous 10M high).
This bearish divergence warns that buying pressure is weakening despite higher prices.
Divergence Timing
OBV divergence can persist for extended periods before price reacts. Use divergence as a warning signal, but wait for price confirmation before trading.
2. OBV Breakout Strategy
- Draw trendlines or channels on OBV just like on price charts
- OBV breakout often precedes price breakout
- If OBV breaks out while price consolidates, expect price to follow
- Use OBV breakouts for early entry signals
3. OBV with Moving Average
- Add a moving average (typically 20-period) to OBV
- OBV crossing above MA = bullish signal
- OBV crossing below MA = bearish signal
- Provides clearer trend identification
4. Trend Confirmation
- Only take long trades when OBV is rising
- Only take short trades when OBV is falling
- Avoid trading when OBV contradicts price direction
OBV Support and Resistance
You can apply support and resistance concepts to OBV:
- Previous OBV highs act as resistance
- Previous OBV lows act as support
- OBV breaking above previous resistance is bullish
- OBV breaking below previous support is bearish
Advantages of OBV
- Simple to calculate and understand
- Volume leads price - provides early warning signals
- Works well for confirming trends
- Divergence signals are often reliable
- Applicable to any timeframe
Limitations of OBV
- Based solely on closing prices - ignores intraday action
- Equal weight to all volume regardless of price movement size
- Can be noisy in choppy markets
- The absolute OBV value is arbitrary and meaningless
- Works best with liquid stocks that have meaningful volume
OBV Best Practices
- Focus on OBV direction and pattern, not the actual number
- Compare OBV trend to price trend for confirmation
- Use OBV divergence as an early warning, not a trading signal alone
- Combine with price action and other indicators
- Works best on liquid stocks with substantial daily volume
- Use OBV trendlines and support/resistance for additional signals
OBV vs Other Volume Indicators
- OBV vs Volume bars: OBV shows cumulative trend; volume bars show individual day activity
- OBV vs VWAP: OBV is cumulative and long-term; VWAP is intraday average price
- OBV vs Accumulation/Distribution: A/D weighs volume by where close is in daily range; OBV uses full volume
Track Your Volume-Based Trades
Pro Trader Dashboard helps you analyze how volume indicators like OBV affect your trading performance.
Summary
On Balance Volume (OBV) is a powerful volume indicator that tracks cumulative buying and selling pressure. The key to using OBV is focusing on its direction and comparing it to price movement. Rising OBV confirms uptrends, while falling OBV confirms downtrends. Divergences between OBV and price can provide early warning of trend changes. Remember that volume often leads price, making OBV valuable for anticipating moves before they happen. Always combine OBV with price action and other technical tools for best results.
Learn more: Volume Analysis and VWAP Indicator.