The On Balance Volume (OBV) Indicator and How to Trade With It

Joseph Granville (1923–2013) was a genius of technical analysis, and in the 1960s his reputation rose like a powerful wave. Many of his trading methods are still in use today. The moving average (MA) is one of the trading techniques Joe Granville described in his book New Strategy of Daily Stock Market Timing for Maximum Profit, published in 1976.

In the same book, the On Balance Volume (OBV) indicator is one of the most discussed tools, and many traders still use it today to help identify the market trend. Joseph Granville believed that trading volume is the main force behind price movements and reflects the market’s liquidity.

What is the OBV indicator?

On Balance Volume is a volume indicator that measures the momentum of a trend based on how price and volume move together. It is used in technical analysis to gauge buying and selling pressure in the stock market and to find sensible entry points.

How to calculate OBV

OBV is calculated from the closing prices of the current and previous sessions, together with the current session’s volume. Put simply, on balance volume is calculated by adding the day’s volume to a running total when the security closes higher, and subtracting the day’s volume from the running total when it closes lower.

If the current close is higher than the previous close:

Current OBV = Previous OBV + Current volume

If the current close is lower than the previous close:

Current OBV = Previous OBV – Current volume

If the current close equals the previous close:

Current OBV = Previous OBV

Because on balance volume depends on the volume of previous sessions, OBV values can be negative or positive. The OBV line fluctuates around the zero line.

What OBV tells you

• On balance volume rises when volume on down sessions is smaller than volume on up sessions. In that case, rising OBV shows that buying pressure exceeds selling pressure, so price is likely to rise.
• Conversely, when the indicator falls because volume on down sessions exceeds volume on up sessions, falling OBV shows that buying pressure is weaker than selling pressure, so price has a high probability of falling.
• If OBV is rising (higher lows) but price is flat or trending down (lower lows), selling pressure is gradually weakening and price is likely to rise again. This is called a positive (bullish) divergence.
• If OBV is falling (lower highs) but price is flat or trending up (higher highs), buying pressure is gradually weakening and price is likely to fall again. This is called a negative (bearish) divergence.

How to add the On Balance Volume indicator

The OBV indicator helps investors identify trends based on price action and trading volume (two key elements of technical analysis), so its signals are fairly accurate. Below we show how to add the On Balance Volume (OBV) indicator on the FireAnt platform. On other platforms, the steps are similar.

Step 1: Open FireAnt => Open a chart => Choose “Indicators” on the FireAnt toolbar => Type “OBV” and select the indicator.

Step 2: Set the indicator’s display format

Here you can customise the colour, precision and display style to suit yourself.

How to trade with the On Balance Volume indicator

Using On Balance Volume to confirm the price trend

On balance volume rises (the OBV line trends up) together with a rising price trend. Volume on up sessions is higher than volume on down sessions, showing that demand exceeds supply and selling pressure is low. This indicates the stock is in an uptrend.

On balance volume rises (the OBV line trends up) while price rises.

In the HAX example, volume is larger on up sessions than on down sessions. The indicator and price are moving in the same direction. Buying pressure exceeds selling pressure, signalling that the stock is in an uptrend.

When on balance volume falls (the OBV line trends down) and price falls, volume on down sessions is higher than volume on up sessions, showing that selling pressure exceeds buying pressure. This indicates the stock is in a downtrend.

On balance volume falls (the OBV line trends down) together with a falling price trend: volume on down sessions is higher than volume on up sessions, showing that selling pressure exceeds buying pressure.

In the VNM example, we can see that after November the indicator fell along with price. Each time the stock fell, volume rose – meaning selling was very strong – and each time price rebounded, volume was low. Selling pressure exceeded buying pressure, so the stock was in a downtrend.

Anticipating trend reversals through divergence

Divergence between OBV and price action is also considered an important signal for confirming the price trend.

Positive divergence between OBV and price: If price falls and makes a lower low, but OBV makes a higher low, this is a positive divergence signalling that the downtrend is about to end.

Negative divergence between OBV and price: If price rises and makes a higher high, but OBV makes a lower high, this is a negative divergence signalling that the uptrend is about to end.

Limitations of the OBV indicator

One limitation of OBV is that it is a leading indicator: it can generate predictive signals but says very little about what has actually happened in terms of the signals it produces. As a result, it is prone to false signals. Traders can offset OBV’s noise by building a lagging indicator from OBV data – for example, adding a moving average (MA) to OBV and looking for crossovers. Or traders can confirm a price breakout if OBV breaks out at the same time.

Another caution is that a one-day spike in volume can distort the indicator for a long time. For example, unexpected news, a stock being added to or removed from an index, or large block trades by institutional investors can make the indicator jump or drop sharply, yet that volume spike may not confirm the trend.

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Happy trading!