What Is On-Balance Volume (OBV)?
On-Balance Volume (OBV) is a powerful technical analysis tool designed to track the cumulative flow of volume in and out of a security over time. Developed by Joe Granville, it helps traders gauge market demand, potential price movements, and trend strength by focusing on volume dynamics—a key factor often overlooked when analyzing price action alone.
When a security's closing price is higher than the previous day's close, the entire day's volume is considered bullish volume. Conversely, if the closing price is lower, the volume is classified as bearish volume. OBV aggregates this data into a running total, plotted as a line on a chart, providing insights into volume trends that may precede price changes.
How Is On-Balance Volume (OBV) Calculated?
OBV Formula:
- IF [Current Close (C0) > Previous Close (C1)]:
OBV = Previous OBV + Current Volume (V)
(Bullish volume is added) - IF [Current Close (C0) < Previous Close (C1)]:
OBV = Previous OBV – Current Volume (V)
(Bearish volume is subtracted) - IF [Current Close (C0) = Previous Close (C1)]:
OBV remains unchanged
Key Components:
- C0: Current bar’s closing price
- C1: Previous bar’s closing price
- V: Current bar’s trading volume
The underlying principle: Volume precedes price movement. Rising OBV suggests increasing buying pressure, while falling OBV may indicate growing selling pressure.
OBV Trading Example
Scenario: Divergence Warning
- Price Trend: Steady upward movement
- OBV Trend: Declining
- Interpretation: Heavy volume on down days signals weakening momentum despite rising prices.
- Action: Consider selling or avoiding new positions, anticipating a potential reversal.
Scenario: Bullish Reversal Signal
- Price Trend: Downtrend
- OBV Trend: Starts rising
- Interpretation: Increasing volume on up days suggests accumulating buying pressure.
- Action: A potential opportunity to buy, expecting a price uptick.
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Key Takeaways
- OBV highlights volume-driven trends that price alone may not reveal.
- Divergences between OBV and price can signal reversals.
- Always combine OBV with other indicators (e.g., moving averages, RSI) for confirmation.
Frequently Asked Questions (FAQs)
1. How effective is OBV for detecting market trends?
OBV excels as a confirmation tool but should be used alongside other indicators to validate trends.
2. Can OBV predict short-term price movements?
While not predictive, OBV’s divergence patterns may foreshadow imminent price changes.
3. Should I use OBV alone?
No. Pair OBV with technical/fundamental analysis for robust decision-making.
4. Which markets suit OBV best?
OBV applies to any volume-supported asset (stocks, Forex, commodities, cryptocurrencies).
5. Does OBV detect market manipulation?
Yes. Unusual volume patterns in OBV may reveal artificial activity or wash trading.
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