On-Balance Volume (OBV) is a technical analysis indicator used in financial markets to measure the flow of volume in and out of a security over time. Developed by Joseph Granville in the 1960s, OBV is designed to provide insights into the strength of buying and selling pressure behind price movements.

How OBV Works

OBV is based on the simple premise that volume precedes price movements. The indicator adds the volume on days when the price closes higher and subtracts the volume on days when the price closes lower. The cumulative total is plotted on a chart, creating a line that reflects the overall volume trend

Significance

• Confirmation of Price Trends: One of the primary purposes of OBV is to confirm the strength of a price trend. If prices are rising and OBV is also on an upward trajectory, it suggests a healthy and sustainable bullish trend. Conversely, a declining OBV during a downtrend indicates the potential weakness of the bearish move.
• Divergence Signals: OBV can provide early signals of potential trend reversals. Divergence occurs when the OBV line moves in the opposite direction of the price trend. For example, if prices are making new highs, but OBV fails to follow suit, it could be an early warning of a weakening uptrend.
• Volume Preceding Price Movements: The core principle behind OBV is the belief that volume often precedes price movements. Sudden spikes in volume without corresponding changes in price can indicate an imminent shift in market sentiment, providing traders with valuable information for making informed decisions.
• Identification of Accumulation and Distribution: OBV helps identify periods of accumulation (buying) and distribution (selling). Rising OBV during price consolidations or corrections suggests accumulation, while falling OBV during uptrends may indicate distribution.