On-Balance Volume
A cumulative volume indicator that adds volume on up days and subtracts on down days, revealing whether volume is flowing into or out of an instrument.
Description
On-Balance Volume was developed by Joseph Granville and published in his 1963 book Granville’s New Key to Stock Market Profits. It was one of the first indicators to combine price and volume into a single line. The idea is simple: volume precedes price. When smart money accumulates a position, volume flows in before price breaks out. OBV attempts to make this visible.
How It Works
If today’s close is higher than yesterday’s, today’s volume is added to the running OBV total. If lower, it is subtracted. If unchanged, OBV stays the same. The formula is binary — a 1-cent up-close gets the same treatment as a 10% up-close — all of that day’s volume is assigned as “positive” or “negative.” The result is a cumulative line with no fixed scale.
How to Read It
OBV trending higher alongside price = confirmed uptrend with buying pressure. OBV trending lower alongside price = confirmed downtrend. The key signal is divergence: price makes a new high but OBV fails to confirm it (OBV makes a lower high) — this suggests the up-move lacks volume support and may reverse. The absolute OBV level is meaningless; only the trend and divergences matter.
Common Uses
- Confirming trend strength with volume data
- Detecting divergence as an early reversal warning
- Identifying accumulation before breakouts
- Filtering false breakouts (breakout without OBV confirmation is suspect)
Caveats
OBV’s binary assignment is its biggest limitation: a barely-up close on enormous volume swells OBV as much as a strongly-bullish close on the same volume. A single day with extreme volume can distort the line for many periods. OBV is most useful for identifying divergences rather than as a trend-following tool. Like all volume indicators, it is only as good as the underlying volume data.