OBV (On Balance Volume)
On Balance Volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price. The OBV indicator combines price and volume to show how volume flows can be used to predict upcoming price movements. It was developed by Joe Granville and is one of the most popular volume indicators.
Formula
If closing price > previous close:
OBV = Previous OBV + Current Volume
If closing price < previous close:
OBV = Previous OBV - Current Volume
If closing price = previous close:
OBV = Previous OBV
How OBV Works
OBV measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. When the security closes higher than the previous close, all of the day's volume is considered up-volume. When the security closes lower than the previous close, all of the day's volume is considered down-volume. The indicator shows if volume is flowing into or out of a security.
Trading Strategies Using OBV
Strategy Examples
- OBV Divergence Trading
- OBV Trendline Breakouts
- Volume Confirmation of Price Trends
- OBV Moving Average Crossovers
- Double Top/Bottom Confirmation
Support and Resistance
- OBV trendlines act as dynamic support/resistance
- High volume at price levels indicates strong S/R zones
- OBV breakouts confirm price breakouts
- Divergence at S/R levels signals potential reversals
Trend Identification
- Rising OBV confirms uptrend strength
- Falling OBV confirms downtrend strength
- OBV leading price indicates strong trend
- OBV/Price divergence warns of trend reversal
Advantages and Limitations
Advantages
- Simple and effective volume analysis tool
- Good for confirming price trends
- Helps identify potential reversals
- Can provide leading signals
Limitations
- Can give false signals in choppy markets
- Doesn't account for volume intensity
- Subject to manipulation in low volume stocks
- Should not be used in isolation
Best Practices When Using OBV
- Use multiple timeframes to confirm OBV signals
- Combine with price action and other technical indicators
- Look for OBV divergences with price movements
- Monitor OBV trendlines for potential breakouts
- Use OBV to validate price breakouts and breakdowns
- Consider market conditions when interpreting OBV signals
- Pay attention to OBV behavior at key support/resistance levels
- Compare OBV trends across related securities
- Document which OBV patterns work best for your trading style
- Regularly review and optimize your OBV-based strategies