The OBV Indicator (On Balance Volume) is a cornerstone of technical analysis, developed by Joe Granville to reveal buying and selling pressure in the market. By linking trading volume to price changes, OBV provides unique insights into capital flows, helping traders anticipate future movements.
Discover how this cumulative indicator can refine your analysis and identify optimal entry/exit points in trading.
Core Keywords
- OBV Indicator
- On Balance Volume
- Technical Analysis
- Trading Volume
- Momentum Indicator
- Divergence Trading
- Capital Flows
1. Understanding the OBV Indicator
1.1 What Is the OBV Indicator?
The On Balance Volume (OBV) measures transaction volume and its impact on prices. Developed by Joe Granville in the 1960s, it remains a vital tool for traders to assess market sentiment.
Key Features:
- Cumulative Nature: Adds volume on rising prices, subtracts on falling prices.
- Momentum Insight: Confirms trend strength via volume-price alignment.
1.2 OBV Calculation: The Logic Behind Flows
The OBV formula follows three simple rules:
- Price Rises: Add today’s volume to OBV.
- Price Falls: Subtract today’s volume from OBV.
- Price Unchanged: OBV remains static.
Example:
- Day 1: Volume = 1,000 (price ↑) → OBV = +1,000
- Day 2: Volume = 800 (price ↓) → OBV = –800
1.3 Graphical Representation
OBV is plotted as a single curve below the price chart (e.g., TradingView). Unlike raw volume bars, OBV’s cumulative line highlights sustained buying/selling pressure.
2. Practical OBV Trading Strategies
2.1 Trendline Breakouts
- Method: Draw trendlines on the OBV curve. Breakouts signal shifts in momentum.
- Buy Signal: OBV breaks upward (declining selling pressure).
- Sell Signal: OBV breaks downward (weakening buying pressure).
2.2 Divergence Analysis
- Bullish Divergence: Price makes lower lows, OBV makes higher lows (potential reversal up).
- Bearish Divergence: Price makes higher highs, OBV makes lower highs (potential reversal down).
👉 Learn advanced divergence techniques here
2.3 Combining OBV with Moving Averages
- Filter Signals: Use a moving average (e.g., 20-period SMA) on OBV to confirm trends.
- Example: Enter trades only when OBV crosses above its MA.
3. Pros and Cons of OBV
| Pros | Cons |
|------------------------------------|---------------------------------------|
| Simple interpretation | Ignores buy/sell volume direction |
| Early trend reversal signals | False signals in sideways markets |
| Confirms trend strength | Sensitive to macroeconomic events |
FAQs
Q: How does OBV differ from Accumulation/Distribution?
A: OBV cumulates volume based on price direction, while A/D uses closing price range.
Q: Can OBV predict exact reversal points?
A: No—it flags potential reversals but requires confirmation (e.g., price action).
👉 Explore OBV’s role in crypto trading
Q: Is OBV suitable for all timeframes?
A: Yes, but shorter timeframes may generate more noise.
Conclusion
The OBV Indicator is a powerful tool to gauge market momentum through volume analysis. By leveraging trendlines, divergences, and moving averages, traders can enhance decision-making.
Key Takeaways:
- OBV quantifies buying/selling pressure.
- Divergences warn of trend weakness.
- Combine with price action for higher accuracy.
For deeper insights, practice OBV on historical charts and refine your strategy.