Introduction
The On Balance Volume (OBV) study, introduced by Joe Granville in his 1963 book Granville’s New Key to Stock Market Profits, is one of the earliest indicators to measure positive and negative volume flow. Designed to identify divergence between price action and volume, OBV helps traders anticipate market movements by analyzing volume pressure. This guide explores OBV’s calculation, application in Thinkorswim (TOS), and strategies for spotting divergence.
Table of Contents
What Is the On Balance Volume Study?
The OBV study tracks cumulative volume flow by comparing up-day and down-day volumes. Key features:
- Rising Slope: Up-day volume > Down-day volume.
- Falling Slope: Down-day volume > Up-day volume.
Chartists use OBV to:
- Confirm price trends.
- Detect divergence (discrepancies between price and volume).
👉 Master price action trading to enhance OBV analysis.
Granville’s Insights
Granville emphasized that volume shifts often precede price movements. Key observations:
- Rising OBV signals buying pressure.
- Falling OBV indicates selling pressure.
Pro Tip: Draw trendlines against candle closes (not wicks) for accurate OBV analysis.
Identifying OBV Divergence
Divergence occurs when OBV and price move oppositely. Common scenarios:
- OBV makes lower lows while price holds steady.
- Price makes higher highs with declining OBV.
Example: A small green candle with minimal OBV movement amid large red candles suggests weak buying pressure.
How to Calculate OBV
Formula
- If today’s close > prior close:
Current OBV = Previous OBV + Current Volume - If today’s close < prior close:
Current OBV = Previous OBV - Current Volume - No change if closes are equal.
Customizing OBV in Thinkorswim
Enhance TOS’s default OBV study with:
- Simple Moving Average (SMA): Identifies above/below-average OBV levels.
- Divergence Dots: Green (bullish) and red (bearish) signals.
👉 Optimize your OBV strategy with these tweaks.
Interpreting OBV Crosses
- OBV > SMA: Bullish confirmation.
- OBV < SMA: Bearish signal.
Case Study: OBV crossing below its SMA often precedes price downtrends.
Practical Applications
- Swing Trading: Use OBV to validate breakouts.
- Day Trading: Spot intraday divergence for reversals.
Example: OBV staying below SMA during price rallies warns of weak momentum.
FAQs
1. How reliable is OBV for predicting price moves?
OBV is best used with other indicators (e.g., trendlines, RSI) to filter false signals.
2. Can OBV be used for all timeframes?
Yes, but longer timeframes (daily/weekly) reduce noise.
3. What’s the biggest OBV pitfall?
Overreacting to single divergence signals without confirmation.
Final Thoughts
The OBV study is a powerful tool for gauging volume-driven momentum. Whether you’re a day trader or swing trader, integrating OBV into your analysis can provide early warnings of trend shifts.
Key Takeaways:
- Volume precedes price.
- Combine OBV with SMA for clearer signals.
- Always confirm divergence with price action.
For advanced strategies, explore our Thinkorswim customization guide.
Disclaimer: Trading involves risk. Past performance doesn’t guarantee future results.