The On-Balance Volume (OBV) indicator is a leading technical analysis tool that predicts price movements based on trading volume. Introduced by Joe Granville in 1963, OBV helps traders anticipate market trends by analyzing volume shifts relative to price changes.
Key Takeaways
- OBV is a cumulative indicator adding/subtracting volume based on price direction.
- It identifies bullish/bearish divergences, confirms trends, and signals breakouts.
- Works best when combined with other indicators like moving averages or Bollinger Bands.
How the OBV Indicator Is Calculated
OBV uses a simple formula to track volume changes:
| Condition | Formula |
|-----------|---------|
| Today’s price > Yesterday’s price | OBV = Previous OBV + Today’s Volume |
| Today’s price = Yesterday’s price | OBV = Previous OBV |
| Today’s price < Yesterday’s price | OBV = Previous OBV – Today’s Volume |
Example: If Apple’s stock rises today with 1M shares traded, its OBV increases by 1M. A drop would subtract the same volume.
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Interpreting the OBV Indicator
The OBV line oscillates around a zero line, reflecting buying/selling pressure:
- Rising OBV: Indicates accumulation (buyers dominate).
- Falling OBV: Signals distribution (sellers in control).
Pro Tip: Focus on the OBV line’s direction, not absolute values.
Practical Uses of OBV
1. Spotting Divergences
- Bullish Divergence: Price makes lower lows, but OBV rises → Potential uptrend.
- Bearish Divergence: Price hits higher highs, but OBV falls → Downtrend likely.
2. Confirming Trends
- If OBV rises with price, the uptrend is strong.
- A declining OBV during price rallies warns of weak momentum.
3. Predicting Breakouts
- Rising OBV in a sideways market hints at an upward breakout.
Pros and Cons of OBV
Advantages
✅ Simple calculation.
✅ Flags divergences early.
✅ Confirms trend strength.
Limitations
❌ Sensitive to single-day volume spikes (e.g., news events).
❌ Ignores price-movement magnitude.
❌ Less effective on short timeframes due to market noise.
FAQs
Q1: Can OBV be used alone for trading?
A: No. Combine it with tools like RSI or MACD to filter false signals.
Q2: What timeframe works best for OBV?
A: Daily or weekly charts reduce noise; avoid scalping with OBV.
Q3: How does OBV differ from Volume Weighted Average Price (VWAP)?
A: OBV tracks cumulative volume, while VWAP averages price relative to volume.
Final Thoughts
The OBV indicator is a powerful tool for gauging market sentiment but requires context. Pair it with trend analysis and other indicators for robust trading decisions.
Remember: Volume precedes price—watch OBV closely for early trend clues!
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