What Is the On Balance Volume Indicator?
The On Balance Volume (OBV) is a technical momentum indicator that analyzes volume flow relative to price movements. Developed by Joseph Granville in the 1960s, OBV helps traders:
- Confirm trend strength
- Identify potential reversals (via divergences)
- Spot accumulation/distribution phases
How It Works:
- Price closes higher → Day’s volume is added to the cumulative OBV line.
- Price closes lower → Day’s volume is subtracted.
- No price change → OBV remains unchanged.
A rising OBV signals buying pressure; a falling OBV indicates selling dominance.
How to Calculate OBV
Formula:
OBV = Previous OBV + (Current Volume × Price Change Multiplier) Rules:
- Green day (close > previous close): Add volume.
- Red day (close < previous close): Subtract volume.
- Unchanged close: Volume impact = 0.
Example:
| Day | Close Price | Volume | OBV Calculation |
|-----|------------|--------|------------------|
| 1 | $50 | 10,000 | Base OBV = 0 |
| 2 | $52 (+4%) | 12,000 | 0 + 12,000 = 12,000 |
| 3 | $51 (-2%) | 8,000 | 12,000 - 8,000 = 4,000 |
Key Insights from OBV
1. Trend Confirmation
- Uptrend: Rising OBV + Rising Price = Strong bullish momentum.
- Downtrend: Falling OBV + Falling Price = Persistent selling.
2. Divergence Signals
- Bullish Divergence: Price makes lower lows; OBV makes higher lows → Potential upward reversal.
- Bearish Divergence: Price makes higher highs; OBV makes lower highs → Likely downward reversal.
3. Breakout Clues
- OBV spikes during consolidation → Warns of an impending breakout (e.g., surge in buying volume before price jumps).
Trading Strategies Using OBV
Strategy 1: OBV Trendline Breakouts
- Draw trendlines on OBV (not price).
Enter trades when OBV breaks:
- Above resistance → Long position.
- Below support → Short position.
👉 See how Bitcoin traders use OBV trendlines
Strategy 2: OBV + RSI Combo
- RSI oversold (<30) + OBV bullish reversal → Buy signal.
- RSI overbought (>70) + OBV bearish reversal → Sell signal.
Strategy 3: OBV with Support/Resistance
- Price tests resistance + Bearish OBV divergence → Short opportunity.
Pros and Cons of OBV
| Advantages | Disadvantages |
|--------------------------------|----------------------------------|
| Confirms trend strength | False signals in choppy markets |
| Early reversal detection | Less precise for day trading |
| Simple to interpret | Requires volume data accuracy |
OBV vs. Other Volume Indicators
| Indicator | Key Difference | Best For |
|----------------------|--------------------------------------------|------------------------|
| Accumulation/Distribution | Weights volume by closing price position | Range-bound markets |
| Money Flow Index (MFI) | Includes overbought/oversold levels (0–100) | Short-term momentum |
| VWAP | Tracks average price × volume intraday | Day trading |
FAQs
Q: Is OBV reliable for crypto trading?
A: Yes, but use tick volume data cautiously—decentralized exchanges may skew accuracy.
Q: Can OBV predict exact reversals?
A: No. It flags potential reversals; confirm with price action or additional indicators.
Q: What’s the best timeframe for OBV?
A: Daily/weekly charts reduce noise; avoid tick-level data for clearer signals.
👉 Explore advanced OBV strategies
Final Tip: Combine OBV with price patterns (e.g., head-and-shoulders, double tops) for higher-probability trades. Always backtest strategies before live execution!