What is On-Balance Volume (OBV)?
Definition
On-Balance Volume is a momentum indicator that uses volume flow to predict changes in stock price. It adds volume on up days and subtracts volume on down days, creating a cumulative total that reflects buying and selling pressure.
Detailed Explanation
OBV was developed by Joseph Granville and is based on the theory that volume precedes price. When a stock closes higher than the previous close, the day's volume is added to the running OBV total. When it closes lower, the volume is subtracted. The absolute OBV value matters less than its trend and divergences.
A rising OBV indicates that volume is heavier on up days, suggesting accumulation (buying pressure). A falling OBV indicates distribution (selling pressure). When OBV is rising while price is flat, it may foreshadow an upward price move.
OBV divergences are particularly significant. If price makes a new high but OBV does not, it suggests the advance is not supported by strong volume and may reverse. Conversely, if price makes a new low but OBV makes a higher low, selling pressure is diminishing.
OBV is most useful for confirming price trends and identifying potential reversals before they appear in price alone. It works well on daily and weekly charts for swing trading and position trading.
Formula
If Close > Previous Close: OBV = Previous OBV + Volume; If Close < Previous Close: OBV = Previous OBV - VolumeExample
A stock makes three consecutive new highs, but OBV fails to reach a new high on the third attempt. This bearish divergence suggests weakening buying conviction and warns of a potential reversal.
Frequently Asked Questions
How do I interpret OBV?
Is OBV better than volume alone?
What timeframe works best for OBV?
Related Terms
Moving Average
A moving average is a technical indicator that smooths price data by calculating the average price over a specific number of periods. It helps identify trends, support and resistance levels, and potential buy or sell signals by filtering out short-term price noise.
Volume
Volume is the total number of shares or contracts traded in a security during a given period, typically a single trading day. It measures the intensity of trading activity and is a key indicator of market interest, liquidity, and the strength of price movements.
MACD (Moving Average Convergence Divergence)
MACD is a trend-following momentum indicator that shows the relationship between two exponential moving averages of price. It generates signals through crossovers of the MACD line and signal line, zero-line crossovers, and divergences with price.
Support and Resistance
Support and resistance are price levels where a stock historically tends to stop falling (support) or stop rising (resistance). These levels form because of concentrated buying or selling interest and are foundational concepts in technical analysis.
See It in Action
Disclaimer: The information on this page is provided for educational and informational purposes only and does not constitute investment advice. AI-generated analysis may contain errors or inaccuracies. Always conduct your own research and consult a qualified financial advisor before making investment decisions.
See On-Balance Volume (OBV) in Action
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