On-Balance Volume (OBV)

What is OBV?

On-Balance Volume (OBV) is a volume-based momentum indicator developed by Joseph Granville in 1963. It tracks cumulative trading volume and uses the direction of price changes to infer whether volume is flowing into (accumulation) or out of (distribution) a security. The central idea is that volume often precedes price: sustained volume pressure in one direction can foreshadow a corresponding price move.

Key points
* OBV is cumulative: absolute values depend on the chosen start point; analysts focus on the line’s slope and direction.
* It helps identify whether “smart money” (large, institutional traders) is buying or selling relative to price moves.
* OBV is a leading indicator and should be confirmed with other tools to reduce false signals.

Formula and calculation

OBV updates each period according to the change in closing price:
* If close > previous close: OBV = OBV_prev + volume
* If close < previous close: OBV = OBV_prev − volume
* If close = previous close: OBV = OBV_prev

Put simply: add that period’s volume on up-days, subtract volume on down-days, and leave it unchanged on flat days.

10-day example

Hypothetical closing prices and volumes:

• Day 1: Close $10.00, Volume 25,200 — OBV = 0 (starting point)
• Day 2: Close $10.15, Volume 30,000 — OBV = 30,000
• Day 3: Close $10.17, Volume 25,600 — OBV = 55,600
• Day 4: Close $10.13, Volume 32,000 — OBV = 23,600
• Day 5: Close $10.11, Volume 23,000 — OBV = 600
• Day 6: Close $10.15, Volume 40,000 — OBV = 40,600
• Day 7: Close $10.20, Volume 36,000 — OBV = 76,600
• Day 8: Close $10.20, Volume 20,500 — OBV = 76,600 (no change)
• Day 9: Close $10.22, Volume 23,000 — OBV = 99,600
• Day 10: Close $10.21, Volume 27,500 — OBV = 72,100

How traders use OBV

• Trend confirmation: A rising OBV that parallels rising price supports bullish conviction. A falling OBV with falling price supports bearish conviction.
• Divergence spotting: If price makes new highs but OBV fails to follow (or vice versa), this divergence can signal weakening momentum and a possible reversal.
• Breakout confirmation: Traders often look for OBV breakouts (or crossovers of an OBV moving average) to validate price breakouts.

Comparisons with related indicators

• Accumulation/Distribution (A/D) line: Both use volume to detect money flow, but A/D weights volume by the position of the close within the period’s range (price extent), whereas OBV only uses the sign of the price change (up/down/flat).
• Volume-Price Trend (VPT): Similar to OBV in accumulating volume, but VPT scales volume by the percentage change in price — capturing the magnitude of price moves as well as direction.

Limitations and practical tips

• Leading, not definitive: OBV can produce false signals; confirm with lagging indicators (moving averages, MACD, etc.).
• Single-day spikes: Big one-off volume events (earnings surprises, index rebalancing, large block trades) can skew OBV for an extended period and may not indicate a trend.
• Start-point dependence: Because OBV is cumulative, its numeric level is arbitrary; focus on direction, slope, and divergences rather than absolute values.
• Use context: Combine OBV with price patterns, support/resistance, average daily trading volume (ADTV), and volatility measures to improve signal reliability.

Related concept — Average Daily Trading Volume (ADTV)

ADTV is the average number of shares traded per day for a security. It informs liquidity and helps interpret OBV moves: a volume-driven OBV change during high ADTV is more meaningful than the same change on low ADTV.

Bottom line

OBV is a simple, useful tool for reading volume pressure and anticipating price movement. Its greatest value lies in trend confirmation and divergence detection, but because it is a leading indicator and sensitive to singular volume events, it should be used alongside other technical and fundamental tools to make robust trading decisions.