OBV - Confirming Trends Through Volume Flow

What is OBV

OBV (On-Balance Volume) is an indicator that accumulates volume flow to confirm the strength and direction of price trends. It was first introduced by Joseph Granville in 1963 in his book "Granville's New Key to Stock Market Profits."

Granville's core idea is simple yet powerful. Volume precedes price. In other words, when large capital flows into the market, volume increases first, and price follows later. OBV was designed to capture these movements of "smart money."

OBV Calculation Method

OBV calculation is very intuitive. It's a cumulative method that adds or subtracts daily volume based on price change direction.

When price rises: OBV = Previous OBV + Current Volume When price falls: OBV = Previous OBV - Current Volume When price is unchanged: OBV = Previous OBV (no change)

Calculation Example

In the above example, as price generally rises, OBV also rises together. This indicates that the uptrend is supported by volume.

How to Read OBV - Direction is Key

The most important principle when interpreting OBV: The absolute value of OBV is meaningless. Whether OBV is 1,000 or 100,000, the number itself doesn't matter. What matters is which direction OBV is moving.

OBV Trend Interpretation

Accumulation is the phase where large players quietly gather positions without significantly raising prices. During this time, price moves sideways but OBV gradually rises. Conversely, Distribution is the phase where large players sell their holdings - price is maintained but OBV falls.

Confirming Price Trends with OBV

The most basic use of OBV is confirming whether the current price trend is healthy.

Trend Confirmation

• Rising price + Rising OBV: Healthy uptrend. Volume supports the rise, so the trend is likely to continue.
• Falling price + Falling OBV: Healthy downtrend. Selling pressure actually exists, so further decline is possible.

When price and OBV move in the same direction, confidence in the current trend increases. If the trend identified by moving averages is also confirmed by OBV, you can have greater conviction in that trend.

OBV Divergence - The Most Powerful Signal

The true value of OBV emerges when it moves opposite to price, that is, when divergence occurs. While more detailed content on divergence is covered in the Divergence article, here are the key concepts of OBV divergence.

Bearish Divergence

When price makes a new high but OBV fails to exceed its previous high. This means that while price is rising, volume support is weakening, suggesting weakening uptrend or potential reversal.

Price: High A < High B (higher high) OBV: High A > High B (lower high) Interpretation: Weakening bullish momentum, reversal warning

Bullish Divergence

When price makes a new low but OBV maintains a level higher than its previous low. This means selling pressure is diminishing, suggesting weakening downtrend or potential reversal.

Price: Low A > Low B (lower low) OBV: Low A < Low B (higher low) Interpretation: Weakening bearish momentum, potential reversal

OBV Breakout - Signals That Move Before Price

As Granville emphasized, there are cases where OBV breaks trendlines or resistance levels before price does. This is called an OBV leading breakout.

For example, if price is consolidating in a range but OBV breaks above its previous high first, this is a strong signal that accumulation is quietly progressing. Price is then likely to break upward as well.

Conversely, if price is still above support but OBV breaks below its previous low first, distribution may be in progress and a price decline could be imminent.

Applying Moving Averages to OBV

Applying a moving average to the OBV line itself can improve signal quality. Overlay a 20-day moving average on OBV, then interpret OBV above its moving average as an accumulation zone and below as a distribution zone.

Limitations of OBV

Distortion from Gaps and Large Volume Candles

OBV adds the entire volume identically whether price rose by $1 or $1,000. Because of this, days with large volume but small price changes can significantly distort OBV.

Binary Classification

If price rises, the entire day's volume is classified as buying; if it falls, the entire volume is classified as selling. In reality, there is selling on up days and buying on down days, but OBV cannot distinguish this.

Instability in Ranging Markets

In ranging markets where price fluctuates without direction, OBV moves irregularly and has difficulty providing reliable signals.

Combining with Other Indicators

OBV is more effective when combined with other indicators rather than used alone.

See Multi-Indicator Strategy for more detailed combination methods.

OBV in Cryptocurrency Markets

There are points to note when using OBV in cryptocurrency markets. Since cryptocurrencies trade simultaneously on multiple exchanges, OBV values can differ depending on which exchange's volume data is used. Using aggregated volume data from multiple exchanges can improve accuracy when possible.

Also, cryptocurrency markets may have inflated volume due to wash trading, so it's important to use data from reliable exchanges.

Summary

OBV visualizes important market information - volume - in a cumulative manner, allowing you to understand market dynamics that aren't visible from price alone. Divergence between price and OBV is particularly powerful for detecting trend reversals early. With simple calculation and intuitive interpretation, it's a volume indicator that even beginner investors can easily approach.

Next article: VWAP - Volume Weighted Average Price