What is On-Balance Volume

On-Balance Volume (OBV) is a technical analysis indicator that uses volume flow to predict price movements. It's a cumulative indicator that adds volume on up days (when the price closes higher than the previous close) and subtracts volume on down days. A rising OBV suggests buying pressure, while a falling OBV indicates selling pressure.

On-Balance Volume (OBV) is a cumulative indicator that adds volume when the price closes higher and subtracts it when the price closes lower. Rising OBV signals accumulation, while falling OBV indicates distribution. It’s a momentum-based indicator used to confirm trends.

Traders and investors use OBV to:

• Confirm price trends
  

• Detect divergence (when price and OBV move in opposite directions)
  

• Predict potential reversals or breakouts
  

• Analyse accumulation (buying) or distribution (selling) patterns
  

It’s considered more effective when used alongside other indicators such as moving averages or trend lines.

The formula to calculate OBV is simple:

• If the closing price today is higher than yesterday,
  OBV = Previous OBV + Today’s Volume
  

• If the closing price today is lower than yesterday,
  OBV = Previous OBV – Today’s Volume
  

• If the closing price is unchanged,
  OBV = Previous OBV
  

This cumulative total creates a line graph which is used to compare price movement versus volume momentum.

Example:
If a stock has an OBV of 1,000,000 and closes higher with a volume of 50,000, the next day’s OBV is 1,050,000. If it then closes lower with a volume of 30,000, OBV becomes 1,020,000.

The interpretation of OBV focuses on how it behaves in relation to price:

Confirming Trend

If both price and OBV are rising, it indicates the trend is strong and supported by volume.

Bearish Divergence

If price makes new highs but OBV fails to follow, it could signal weakening buying interest and a potential reversal.

Bullish Divergence

If price falls to a new low but OBV does not, it may indicate the selling pressure is weakening and a reversal might be near.

OBV is often used in various scenarios:

Breakout Confirmation

Before a breakout from resistance, a sharp rise in OBV can be a sign that volume is flowing in, supporting the breakout.

Trend Continuation

If a stock is trending upward and OBV continues to rise, it shows strong participation and may suggest the trend will persist.

Filtering False Signals

Sometimes, a price breakout without an OBV confirmation may be a false move. OBV acts as a secondary filter for such trades.

Here’s how OBV compares with other popular volume-based indicators:

Each has its own strengths, and OBV is particularly valued for its simplicity.

While helpful, OBV has certain limitations:

• No absolute value: It’s a cumulative measure, so its level isn’t inherently meaningful without context
  

• No consideration for intra-day price moves: Only the closing price matters
  

• Requires confirmation: Should be used in combination with other tools
  

• Subject to false signals: During sideways markets, OBV may be choppy and unclear
  

Most trading platforms like Zerodha Kite, TradingView, or Groww offer OBV as a built-in indicator.

Steps to apply OBV on a chart (e.g., TradingView):

Step 1: Open the stock’s chart

Step 2: Click on ‘Indicators’

Step 3: Search for ‘On Balance Volume’

Step 4: Add it to the chart

Step 5: Analyse the OBV line alongside price candles

You can also draw trendlines on the OBV to spot patterns or divergence more clearly.

• OBV works well in trending Indian stocks with higher liquidity
  

• Use daily charts for swing trades and weekly charts for longer-term views
  

• Combine OBV with RSI or Moving Averages for improved accuracy
  

• Avoid relying solely on OBV during news-driven volatility

On-Balance Volume (OBV) is classified as a leading indicator—it aims to signal potential future price moves by tracking cumulative volume flow, based on the idea that volume often precedes price changes.

Despite its predictive intent, OBV isn’t flawless—it can generate false signals. That’s why it is frequently used alongside lagging indicators like moving averages to enhance reliability.

On-Balance Volume is a valuable indicator for traders aiming to understand the role of volume in price movement. By combining price action and volume data, it helps traders make better-informed decisions about trend strength and possible reversals.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.