OBV Indicator Every Trader Should Know - The Mysterious Trading Volume Analysis Tool

When it comes to analyzing stock markets and crypto markets, investors often focus on price as the main teacher. But the truth is, (Volume) is the real driver behind price movements. The problem is that there aren’t many tools for analyzing trading volume. If you’re looking for ways to read market strength signals through Volume, this article will introduce you to the OBV Indicator (On Balance Volume), one of the tools popular among professional traders.

What is the OBV Indicator - Basic Understanding

On Balance Volume or OBV is an indicator designed to measure the accumulated buying and selling pressure (Cumulative Volume) of the asset you’re tracking. It was developed by Joseph Granville in 1963 from his book “Granville’s New Key to Stock Market Profits.”

The core idea of the OBV indicator is: Volume is the mother of price. If you see prices rising but volume isn’t increasing proportionally, it’s a warning sign that the rally may not be strong.

How OBV Works

OBV operates based on tracking the direction of open-close prices:

• Closing higher than previous: The volume of this candle is added to the existing OBV (Bullish Signal)
• Closing lower than previous: The volume is subtracted from the OBV (Bearish Signal)
• Closing the same: OBV remains unchanged (Neutral between bullish and bearish phases)

This way, traders can see the overall energy being accumulated over time and detect whether the market is being controlled by buyers or sellers.

How to Calculate the OBV Indicator and Practical Examples

How to Calculate On Balance Volume

The calculation formula for OBV is quite straightforward:

OBVt = OBVt-1 + Volumet (if closing price is positive)
OBVt = OBVt-1 - Volumet (if closing price is negative)
OBVt = OBVt-1 (if closing price is unchanged)

Where:

• OBVt = current period’s OBV value
• OBVt-1 = previous period’s OBV value
• Volumet = trading volume in the current period

Real Data Example: Calculating OBV in Practice

Understanding through real data example (GOOG):

From this example, you can see that OBV doesn’t model the price directly but reflects the momentum behind it. When prices go up, OBV increases; when prices fall, OBV decreases.

How to Read Signals from the OBV Indicator in Trading

1. Confirming Trend Strength

A truly bullish trending market will show OBV following the price confidently. Meaning:

• Price rising + OBV accelerating = genuine bullish momentum
• Price rising + OBV stagnating = warning sign that buying power is waning
• Price falling + OBV accelerating downward = genuine bearish momentum

2. Detecting Divergence (OBV Divergence) - Trend Reversal Indicator

OBV Divergence occurs when the price and OBV indicator send conflicting signals:

• New high in price but OBV not making a new high = the uptrend may be ending; a reversal could be imminent
• New low in price but OBV not making a new low = the downtrend may be losing strength; a reversal upward might be coming

Trading Strategies Using the OBV Indicator - Combined Formulas

Strategy 1: OBV + Moving Average (MA)

Combining OBV with EMA (Exponential Moving Average) helps you see:

• When EMA is bullish and OBV is rising = buy signal
• When price breaks below EMA with OBV divergence = prepare to exit or reduce position

Real Example: JPYUSD on 1-hour timeframe shows a downtrend below EMA25 with declining OBV, but when OBV divergence appears (OBV not making new lows while price does), the price begins to turn upward. This is an entry point.

Strategy 2: OBV + Bollinger Bands

Bollinger Bands help visualize overbought/oversold zones combined with OBV:

• Price hits upper Bollinger Band + OBV divergence = potential end of bullish trend
• Price hits lower Bollinger Band + OBV divergence not making new lows = potential bounce

Real Example: Microsoft (MSFT) on Daily chart shows a strong uptrend with new highs, but OBV starts to stall. When price attempts to break higher but OBV doesn’t follow, it signals a potential reversal. This can be a signal to exit or prepare for a short position.

Advantages and Limitations - How to Use OBV Indicator Wisely

Advantages

• Detects damage after it occurs: OBV divergence often appears before price reverses
• Confirms trend with real data: Not guesswork, since volume is measurable
• Easy to use: Suitable for beginner traders seeking clear market signals

Limitations

• OBV depends solely on volume: In markets with low volume or illiquid markets, signals can be confusing
• Should not be used alone: Always combine with other indicators for confirmation

Summary - Why Traders Must Learn the OBV Indicator

On Balance Volume (OBV Indicator) is not just a number on the screen but a window into the market’s psyche. When you learn to read OBV well, you gain internal market insights that tell you:

• How strong the current trend is
• When buying or selling momentum is waning
• Future price movements

This is the true value of deeply understanding the OBV indicator. Trading isn’t about guessing; it’s about reading the market’s reality through data. And the OBV indicator is a tool that makes that reading clearer.