On-Balance Volume (OBV) is a momentum indicator that uses volume flow to predict price changes. Created by Joe Granville, OBV adds volume on up days and subtracts it on down days, creating a running total. The theory: volume precedes price—smart money accumulates before breakouts and distributes before breakdowns.
- Cumulative volume: adds on up days, subtracts on down days
- Direction matters more than absolute value
- Divergences between OBV and price are powerful signals
How OBV Works
OBV tracks cumulative volume flow:
OBV Calculation:
If Close > Previous Close:
OBV = Previous OBV + Today's Volume
If Close < Previous Close:
OBV = Previous OBV - Today's Volume
If Close = Previous Close:
OBV = Previous OBV (unchanged)
Example:
Day 1: Close ₹100, Volume 1M → OBV = 1M
Day 2: Close ₹102 (+), Volume 1.5M → OBV = 2.5M
Day 3: Close ₹101 (-), Volume 1M → OBV = 1.5M
Day 4: Close ₹103 (+), Volume 2M → OBV = 3.5M
Quick Reference: OBV Signals
| OBV Pattern | Interpretation | Action |
|---|---|---|
| Rising OBV | Accumulation | Bullish |
| Falling OBV | Distribution | Bearish |
| OBV breakout | Volume leading | Anticipate price break |
| OBV divergence | Conflict signal | Reversal warning |
Example: OBV Divergence Trade
Bearish OBV Divergence:
| Day | Price | OBV | Analysis |
|---|---|---|---|
| 1 | ₹100 (high) | 5M | First peak |
| 10 | ₹95 | 4.5M | Pullback |
| 20 | ₹105 (higher high) | 4.8M | OBV lower high! |
| Analysis | - | - | Bearish divergence |
| 25 | ₹98 | 4M | Price followed OBV |
Signal: Price higher high, OBV lower high = distribution happening.
OBV tracks cumulative volume—adding on up days, subtracting on down days. Rising OBV shows accumulation; falling shows distribution. OBV divergence from price is a powerful reversal warning. Volume often leads price.
OBV Trading Strategies
Trend Confirmation
OBV trending same direction as price confirms the trend is healthy.
Divergence Trading
- Bullish: Price lower low, OBV higher low → Buy setup
- Bearish: Price higher high, OBV lower high → Sell setup
Breakout Anticipation
OBV breaking out before price suggests price will follow.
Support/Resistance
Draw trendlines on OBV. OBV breaking its trendline can precede price.
OBV Interpretation
OBV Rising
More volume on up days than down days. Buyers are in control. Bullish.
OBV Falling
More volume on down days than up days. Sellers are in control. Bearish.
OBV Flat
Balance between buying and selling. Consolidation likely.
OBV Breakout
OBV breaking to new highs before price often precedes price breakout.
OBV Limitations
- Doesn’t show magnitude – All up days treated equally, regardless of how much price rose.
- Gap sensitivity – Gap days can distort OBV.
- Works best on daily – Less reliable on intraday.
- Needs context – OBV alone isn’t a complete system.
Common Mistakes
-
Focusing on absolute value – Direction matters, not the number.
-
Ignoring divergences – Divergences are OBV’s most valuable signal.
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Using on illiquid stocks – Low volume distorts OBV.
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Short-term noise – Look at OBV trend, not daily wiggles.
How JournalPlus Tracks Volume
JournalPlus logs OBV conditions and divergences at entry, helping you analyze whether volume-based signals improve your trading.
