OBV - A volume analysis tool every trader should know

In the world of digital trading, we often focus too much on price, but in reality, (Volume) is the key driver behind price movements. Today, we will discuss a tool that helps traders read trend strength signals accurately: On Balance Volume (OBV) — an indicator that uses accumulated trading volume to predict reversals or confirm trend strength.

What is On Balance Volume (OBV)

OBV is a momentum indicator (Momentum Indicator) that measures the power of accumulated trading volume by calculating from the volume traded. This metric was developed by Joseph Graniville in 1963 from his book Granville’s New Key to Stock Market Profits. He believed that trading volume does not follow price movements but is a crucial driving force behind price changes.

When institutional investors or large capital traders execute trades, they often do so in massive quantities. OBV helps retail traders track this trading behavior by observing whether the accumulated volume is increasing or decreasing.

How OBV Works

The calculation of OBV is based on a simple concept:

When the closing price rises — the volume of that candle is added to the existing OBV (indicating buying pressure)

When the closing price falls — the volume is subtracted from the OBV (indicating selling pressure)

When the closing price remains unchanged — OBV stays the same

By tracking this accumulated buying and selling power, traders can observe:

• Price rising with increasing OBV = strong bullish trend
• Price falling with decreasing OBV = strong bearish trend
• Price rising but OBV declining = warning that the uptrend may end
• Price falling but OBV rising = warning that the downtrend may be losing momentum

Formula and Calculation Method for On Balance Volume

Calculating OBV is straightforward:

Basic formulas:

• OBVt = OBVt-1 + Volumet (if current close > previous close)
• OBVt = OBVt-1 - Volumet (if current close < previous close)
• OBVt = OBVt-1 (if current close = previous close)

where OBVt is the accumulated volume at the current period, OBVt-1 is the previous period’s accumulated volume, and Volumet is the volume in the current period.

Real example (GOOG Daily):

From this example, you can see that OBV follows the buying and selling power by adding or subtracting volume according to the price trend.

Using OBV to Confirm Trends

Traders can use OBV to verify whether the current trend is strong or not.

Example: JPYUSD (1-hour system)

When the JPYUSD price drops below EMA25 with OBV decreasing steadily, it confirms a strong downtrend. However, when OBV begins to stop making new lows (OBV Divergence) while the price continues to decline, it signals that selling pressure is waning.

When the price starts to rebound and attempts to break above EMA25, traders can open buy positions with a stop-loss at the previous low.

Detecting Trend Reversals

OBV is highly effective for spotting reversals by looking for OBV Divergence:

Scenario 1: Uptrend but OBV declines
Price makes new highs, but OBV does not follow or even drops, indicating that while prices are rising, buying strength is weakening. This warns that the uptrend may end.

Scenario 2: Downtrend but OBV rises
Price drops below previous lows, but OBV increases less than the price decline, suggesting selling pressure is exhausted and a reversal may be imminent.

Example: MSFT (Daily)

Microsoft previously made higher highs (Higher High) with OBV rising, indicating a strong uptrend. But when the price tested the previous high, OBV failed to make a new high, showing divergence.

Recently, when the price hit the upper Bollinger Band and broke below the SMA20 with a large red candle, it signaled a Shift in Power (Shift in Power), allowing traders to enter a sell position with a stop at the previous high.

Combining OBV with Other Tools

OBV + Moving Average (MA)

Combining OBV with moving averages helps traders to:

• Detect divergence from OBV
• Confirm trend changes via MA breakouts
• Increase accuracy in swing trading

OBV + Bollinger Bands

Using OBV with Bollinger Bands helps to:

• Find trend reversal points via divergence signals
• Confirm reversals when price breaks out of the bands
• Identify low-risk entry points

Summary

On Balance Volume (OBV) is one of the few indicators that primarily uses trading volume to analyze and predict price movements. It allows traders to monitor accumulated buying and selling power and forecast changes more accurately.

Whether confirming a strong trend or detecting warning signals of reversals, understanding how this tool works will enhance your trading decisions. When combined with other analysis tools like MA or Bollinger Bands, OBV becomes a favorite among professional traders.