What Is On-Balance Volume?
On-Balance Volume (OBV) is a cumulative indicator that adds the entire day volume on up-close days and subtracts the entire volume on down-close days. The resulting running total reflects whether volume is flowing into (accumulation) or out of (distribution) an asset. The direction of OBV matters more than its absolute value.
How On-Balance Volume Works
OBV calculation: if today close is higher than yesterday, OBV = Previous OBV + Today Volume. If lower, OBV = Previous OBV - Today Volume. If unchanged, OBV stays the same. The simplicity is the strength: OBV creates a single line that shows the cumulative pressure of buying versus selling volume over time.
Why It Matters for Traders
OBV is a powerful confirmation tool: if price is rising and OBV is also rising, the uptrend is supported by volume (healthy). If price is rising but OBV is flat or declining, the rally lacks volume support and is likely to fail (bearish divergence). Similarly, if price is falling but OBV is rising, accumulation is occurring beneath the surface (bullish divergence). OBV divergences often precede major price reversals by days or weeks.
