On-Balance Volume

A cumulative volume indicator that adds volume on up days and subtracts volume on down days, used to confirm price trends or identify divergences that warn of potential reversals.

On-Balance Volume (OBV) was developed by Joseph Granville in the 1960s. The logic is simple: volume is added to a running total on days when the close is higher than the prior close, and subtracted on days when the close is lower. The absolute level of OBV is meaningless; what matters is its trend and whether it confirms or diverges from price movement.

OBV is based on the principle that volume precedes price. Smart money accumulates positions quietly before a price move, and this activity shows up in volume before it shows up in price. When price is rising and OBV is also rising, it confirms that buying volume is supporting the advance — a healthy signal. When price makes new highs but OBV fails to do so (bearish divergence), it suggests that volume is not supporting the price move and the advance may be on thin ice.

OBV is most useful as a confirmation and divergence tool rather than a standalone signal generator. A breakout in price that is not confirmed by OBV making a new high is considered a weaker, potentially false breakout. Conversely, OBV reaching new highs while price is still consolidating below resistance can signal that a breakout is coming. The indicator is best used on daily or weekly charts where accumulation/distribution patterns are most meaningful.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.