On-Balance Volume (OBV)

On-Balance Volume (OBV) is a cumulative volume indicator introduced by Joseph Granville in his 1963 book Granville's New Key to Stock Market Profits. It keeps a running total: add the day's volume when price closes up, subtract it when price closes down. Granville's idea was that volume flows ahead of price, so changes in OBV can reveal accumulation or distribution before price makes it obvious.

The formula#

If close > previous close: OBV = previous OBV + volume
If close < previous close: OBV = previous OBV − volume
If close = previous close: OBV = previous OBV

The absolute value of OBV does not matter; it depends on where you start counting. What matters is its direction and how it compares with price.

How to read OBV#

Common OBV signals#

Divergence#

The most watched signal. If price makes a new high but OBV does not, the advance is happening on lighter up volume, a sign of weakness. If price makes a new low but OBV holds higher, selling volume is drying up. See Volume Divergence.

OBV breakouts#

Some traders draw trend lines or support and resistance on OBV itself. An OBV breakout to new highs while price is still in a range can signal that buyers are building positions and a price breakout may follow.

Trend confirmation#

Many traders simply check that OBV is moving in the same direction as price before trusting a trend.

Combining OBV with price structure#

OBV is most useful as a second opinion. When price breaks out of a range and OBV breaks to new highs at the same time, the breakout has volume behind it. When price breaks out but OBV stays below its prior peak, be more cautious and consider a smaller position or waiting for a retest.

Limitations#

• All or nothing: OBV assigns a day's entire volume to buyers or sellers based only on the close versus the previous close. A day that closes up one cent on huge volume adds all of it.
• Spikes distort it: a single extreme volume day can shift OBV for months.
• No fixed levels: there are no overbought or oversold readings.
• Volume data: less meaningful in spot forex, where real volume is not available.

The Accumulation/Distribution line addresses the first weakness by weighting volume according to where the close falls within the day's range. See Accumulation/Distribution.

Common mistakes#

• Reading the absolute OBV number, which depends on the start date.
• Treating every small divergence as significant.
• Ignoring unusual volume days that skew the line.

Frequently asked questions#

What does On-Balance Volume show?#

Whether volume is flowing into or out of an asset, by adding volume on up days and subtracting it on down days.

What is OBV divergence?#

When price and OBV move in different directions, such as price making a new high while OBV does not, suggesting the move lacks volume support.

Is OBV a leading indicator?#

Granville believed volume leads price, and OBV sometimes rises before breakouts, but it is not reliably predictive and is best used as confirmation.

Sources#

• Wikipedia, On-balance volume