On Balance Volume | Indicator Series

On Balance Volume (OBV) is a cumulative technical indicator that uses volume to predict future prices. It was developed by Joseph Granville in 1963 and published in his book “Granville’s New Key to Stock Market Profits”. OBV is a leading indicator that can be used together with other lagging indicators to confirm a trade opportunity. Check out tradingview’s advanced charting tools

How OBV Is Calculated 

OBV is a cumulative indicator. On days that price is up, that day’s volume is added to the cumulative OBV total. On days that price is down, that day’s volume is subtracted from the cumulative OBV total. OBV is often plotted as a line to make it easy for traders to interpret. The basic theory behind OBV is that volume precedes price. When buying volume exceeds selling volume, OBV is up and confirms the buying pressure. When selling volume exceeds buying volume, OBV is down and confirms the selling pressure.  

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How OBV Is Used 

OBV is primarily used as a confirmation tool for trends and also for forecasting potential reversals as OBV is built on the premise that volume always precedes price.  

  • As a trend confirmation indicator: OBV should rise when the price is rising and fall when the price is falling. When divergence occurs, it’s a sign that the current trend is about to come to an end.  
  • If the price is moving up while OBV is trending down, it’s a bearish divergence. Traders can initiate a short position as soon as price breaks its trendline in a downward move and hold on to the trade while both OBV and the price are in agreement. A stop-loss order should be used to protect traders against a false signal. 
  • If the price is trending down while OBV is moving up, it’s a bullish divergence. Traders can go long with the same tactics as above. 

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