On-balance volume (OBV) basics

On-balance volume (OBV) basics

OBV is the simplest cumulative volume indicator in technical analysis, and it works on the most basic logic possible. Up day? Add that day's volume to a running total. Down day? Subtract it. Flat day? Add zero. The result is a single line that tells you, over time, whether buyers or sellers have been winning the volume war.

Joseph Granville invented OBV in 1963, and the idea has held up because it's simple. Compared to the A/D line you learned in the last lesson, OBV doesn't care WHERE within a candle the close landed — it only cares whether the close was higher or lower than yesterday. That makes it slightly cruder, but also easier to read at a glance. You don't need to think about close location; just up or down.

The main signal: confirmation. If price is making new highs AND OBV is making new highs, the uptrend has full volume support — it's healthy. If price is making new highs but OBV is flat or falling, that's a divergence — fewer total shares are participating in each new high. The trend is hollowing out. That's a yellow flag, not a red one, but it's worth respecting.

OBV vs A/D — which to use? They're cousins. OBV is faster to read but more sensitive to single-candle direction changes. A/D is more refined but takes a beat longer to interpret. Many traders pick one and stick with it. If you're new to volume indicators, start with OBV because it's the easier mental model. Graduate to A/D when you want more nuance about where the close landed.

Recap: OBV = simple cumulative volume signed by daily direction. Read the shape, not the number. Divergence from price is the main signal. Easier cousin of the A/D line.