OBV — On-Balance Volume

Overview

On-Balance Volume (OBV), developed by Joseph Granville in 1963, is a cumulative volume-based indicator that measures buying and selling pressure. Granville’s theory: volume precedes price, so changes in OBV often hint at upcoming price moves before they happen.

OBV is a running total: when price closes up, that day’s volume is added; when price closes down, it’s subtracted. The absolute value of OBV is meaningless — only its direction matters.

Formula

If Close > Previous Close:  OBV = Previous OBV + Volume
If Close < Previous Close:  OBV = Previous OBV - Volume
If Close = Previous Close:  OBV = Previous OBV (no change)

Default Settings

• No parameters — OBV is calculated directly from price/volume
• Often paired with a moving average (e.g., 20-period SMA of OBV) for signals

How to Use It

1. Trend Confirmation

• Price rising + OBV rising → healthy uptrend with volume support
• Price rising + OBV flat or falling → uptrend lacks volume confirmation, vulnerable to reversal

2. Divergence (Most Important Use)

OBV divergence is one of the most reliable volume-based signals:

• Price makes new high but OBV makes lower high → bearish divergence; selling under the surface
• Price makes new low but OBV makes higher low → bullish divergence; accumulation under the surface

3. Breakouts Confirmation

When price breaks out of a range, look at OBV: breakout with OBV expansion = strong; breakout with flat OBV = suspect.

4. Trendline on OBV

Draw trendlines directly on OBV. OBV breaking its trendline often precedes price breaking its own.

Strengths

• Pure volume measurement — reveals institutional accumulation / distribution
• Excellent for divergence detection
• Simple computation, universal applicability
• Often leads price — a true predictive signal

Weaknesses & Common Mistakes

• Doesn’t differentiate volume by intensity — a 0.1 % close-up adds same volume as a 5 % close-up
• Cumulative artifact — OBV value depends on its starting point; only direction matters
• Misreading in low-volume markets — OBV less reliable on illiquid instruments
• Forex limitations — OTC forex has no centralized volume; tick volume is approximate

Best Combinations

• OBV + Trendlines — OBV trendline break + price action confirmation
• OBV + Moving Average — OBV crossing its SMA signals momentum shift in volume flow
• OBV + Price Divergence — the canonical use case

Practical Example

Apple stock, daily chart. Price rallies for 3 weeks making new highs. OBV makes a lower high on the third peak — bearish divergence. Sell short signal confirmed by price breaking the short-term uptrend; OBV had warned of weakening volume support before price showed it.

Bottom Line

Volume tells the story behind the price. OBV is the simplest way to read that story — especially when it disagrees with what price is shouting.