It is a technical indicator that uses volume flow to predict changes in the price of a stock. Developed by Joseph Granville, it shows crowd sentiment that can forecast a bearish or bullish outcome. Many traders feel OBV is one of the best indicators to detect new trading opportunities. 

In This Article 

• What is On-Balance Volume? 

• How To Analyze Chart Using On-balance Volume 

Category 

Momentum

Type 

Leading 

What is On-Balance Volume? 

OBV is a technical indicator of momentum that uses volume changes to make price predictions. It measures buying and selling pressure as a cumulative indicator by adding volume up on days and subtracting it on down days. So, when the stock closes lower than the previous close, all the day’s volume is taken as down-volume. Conversely, when the stock closes higher than the previous close, all the day’s volume is considered up-volume. The OBV line is a running total of negative and positive volume. 

How To Analyze Chart Using On-balance Volume 

For traders, the value of On-Balance Volume isn’t vital. Instead, it’s the rate of change that should concern them. When the volume on up days outpaces the volume on down days, OBV rises. 

On the other hand, it falls when the volume on down days is stronger. If OBV is moving in one direction, then a big move may be coming in that direction in price. 

Here’s how you can analyze this indicator on a chart for trading gains. 

• When both OBV and price make lower troughs and lower peaks, the downtrend is likely to continue. 

• When both OBV and price make higher troughs and higher peaks, the uptrend is likely to continue. 

• During a trading range, if OBV is falling, distribution may be taking place. It is a warning of a downward breakout. 

• If OBV is rising during a trading range, accumulation may be taking place. It is a warning of an upward breakout. 

• If the price continues to make lower troughs and OBV fails to do the same, the downward trend is likely to fail. This situation is known as a positive divergence. 

• If the price continues to make higher peaks and OBV fails to do the same, the upward trend is likely to stall. This situation is known as a negative divergence.