What Is On-Balance Volume?
On-Balance Volume (OBV) is a momentum indicator based on a core principle: volume precedes price. Unlike tracking price movements alone, OBV measures the underlying buying or selling pressure driving those moves.
Developed by Joseph Granville in 1963, OBV addresses price lag by treating volume as a "pressure gauge" for future price action. Imagine it as a coiled spring—accumulating energy before a breakout or reversal.
The OBV Formula Simplified
OBV calculates volume flow with straightforward rules:
- Up Day: Close > previous day → Add today’s volume to OBV.
- Down Day: Close < previous day → Subtract today’s volume from OBV.
- Flat Day: No change.
The result is a cumulative line reflecting volume momentum. Focus on its trend and slope, not absolute values.
Why OBV Still Matters in 2025
1. Tracks Institutional Activity
OBV reveals "smart money" accumulation/distribution before price reacts. For example:
- Volume surges while price stalls → Likely institutional buying.
👉 Combine OBV with institutional ownership data for stronger signals.
2. Divergences Signal Reversals
Key OBV patterns:
- Bullish Divergence: Price hits lower lows, but OBV rises → Selling pressure fading.
- Bearish Divergence: Price peaks higher, but OBV declines → Rally losing steam.
3. Confirms Breakouts
When OBV breaks a trendline before price, it often foreshadows a sustained move. Pair with support/resistance levels for higher-confidence trades.
OBV in Action: A 10-Day Example
| Day | Close | Volume (Shares) | OBV Calculation | OBV Total |
|---|---|---|---|---|
| 1 | $10.00 | 25,200 | Base = 0 | 0 |
| 2 | $10.15 | 30,000 | 0 + 30,000 | 30,000 |
| 3 | $10.17 | 25,600 | 30,000 + 25,600 | 55,600 |
| 4 | $10.13 | 32,000 | 55,600 - 32,000 | 23,600 |
| 5 | $10.11 | 23,000 | 23,600 - 23,000 | 600 |
Key Takeaway: OBV filters noise, highlighting volume-driven momentum shifts.
OBV vs. Accumulation/Distribution (A/D)
| Feature | OBV | A/D Line |
|---------------|-----------------------------|------------------------------|
| Logic | Binary (up/down close) | Weighted (intraday range) |
| Speed | Faster, simpler | Slower, more nuanced |
| Best For | Quick momentum cues | Detailed accumulation clues |
Limitations to Watch For
- Leading Indicator Risks: OBV can signal prematurely. Confirm with lagging tools like moving averages.
- Volume Spikes: Earnings/news events may distort short-term OBV readings.
- Comparative Use: OBV is asset-specific. Compare trends within a stock, not across stocks.
Optimal Use Cases for OBV
- Trend Validation: Rising OBV + higher prices = strong uptrend.
- Range-Bound Stocks: Increasing OBV suggests accumulation before a breakout.
- Breakout Anticipation: OBV breaking resistance before price → Potential early entry.
👉 Enhance OBV strategies with breakout screening tools.
FAQ
Q: Can OBV predict exact price reversals?
A: No—it flags potential reversals via divergences but requires confirmation (e.g., price breaking a trendline).
Q: How do I set the starting point for OBV?
A: The initial value is arbitrary. Focus on relative changes over time.
Q: Is OBV reliable for low-volume stocks?
A: Less effective. OBV thrives on meaningful volume activity (e.g., large caps).
Q: Should I use OBV alone?
A: Pair it with price action (e.g., MACD, RSI) for higher-probability trades.
Final Thought
OBV cuts through price noise to reveal who’s driving the market—institutions or retailers. It’s a timeless tool for traders who value volume’s truth over hype. Use it to spot hidden strength or weakness before the crowd catches on.
No indicators are perfect, but OBV’s simplicity makes it indispensable.