Technical analysisModule 3, lesson 19 of 32
On-balance volume
How on-balance volume adds and subtracts each session's volume, what OBV divergences mean, and why ignoring the size of price moves makes it a weak signal.
In this lesson
- Calculate on-balance volume from closes and volumes.
- Interpret the direction of OBV and divergences from price.
- Explain why OBV ignores the size of price moves and what that costs.
- Explain why rising OBV does not prove that informed investors are buying.
Builds on
- Trading volume and liquidity on chartsOBV is built from daily volume, whose meaning and limits are explained there.
- Moving averagesOBV is often read alongside its own moving average.
On this page
In simple terms
On-balance volume (OBV), popularised by the analyst Joseph Granville, turns volume into a running total that rises and falls with the direction of each session's close:
if today's close > yesterday's close: OBV today = OBV yesterday + today's volume if today's close < yesterday's close: OBV today = OBV yesterday − today's volume if the close is unchanged: OBV today = OBV yesterday
The idea is that volume on up days reflects buying pressure and volume on down days selling pressure, so a rising OBV line shows "accumulation" and a falling one "distribution".
A worked example
Worked example: A made-up share's OBV
Sutlej Wires over six sessions:
| Day | Close | Change | Volume | OBV |
|---|---|---|---|---|
| 1 | 100 | 0 | ||
| 2 | 102 | Up | 5,000 | 5,000 |
| 3 | 101 | Down | 3,000 | 2,000 |
| 4 | 103 | Up | 4,000 | 6,000 |
| 5 | 103 | Unchanged | 2,000 | 6,000 |
| 6 | 105 | Up | 6,000 | 12,000 |
OBV's absolute level is arbitrary, because it depends on the starting day. Only its direction and changes matter.
Reading OBV
- OBV rising with price: more volume on up days than down days during the rise.
- OBV falling with price: more volume on down days during the fall.
- Divergence: price makes a new high while OBV does not, or price makes a new low while OBV does not. Followers of OBV read this as a sign that volume is not supporting the price move.
Traders often compare OBV with its own moving average to judge its direction.
The weaknesses
It ignores the size of price moves. A day on which the share rises by 10 paise counts its whole volume as positive, exactly like a day on which it rises 8%. A share can edge up slightly on heavy volume and fall sharply on light volume, and OBV will rise even though the price is falling overall.
Worked example: OBV and price disagreeing
Over a month, a made-up share has 12 small up days averaging +0.2% on volume of 3 lakh shares each, and 8 sharp down days averaging −1.5% on 2 lakh shares each.
| OBV change: 12 × 3,00,000 − 8 × 2,00,000 | +20,00,000 |
|---|---|
| Price change, roughly: 12 × 0.2% − 8 × 1.5% | about −9.6% |
OBV rose strongly while the price fell almost 10%. The indicator's design, counting direction but not size, produced a misleading picture.
It cannot show who was buying. Every share bought on an up day was sold by someone, as the trading volume lesson explains. Rising OBV shows that up days had more volume than down days, not that "smart money" or institutions were accumulating.
It is distorted by unusual volume. Index changes, block deals and derivative expiries add large volume to single days, which OBV adds or subtracts in full.
Divergences need testing
Divergences between OBV and price are widely discussed, with memorable examples where they preceded big moves. As with every chart signal, the memorable examples are not a fair sample. The false signals lesson explains how to measure a signal's success rate on examples chosen in advance.
Why it matters
OBV is often presented as revealing hidden buying or selling by informed investors. Understanding how simply it is calculated, and what it leaves out, protects you from reading more into it than it can show. It is a rough summary of whether volume has been heavier on up days or down days, nothing more.
Limitations
OBV's level depends on its starting point, it ignores the size of moves, it cannot distinguish buyers from sellers, and it is distorted by mechanical volume. Other volume indicators try to address some of these weaknesses, for example by weighting volume by where the close sits in the day's range, but they share the basic limits of volume data.
Common mistakes
- Reading rising OBV as proof of smart money buying.
- Comparing OBV levels between shares or start dates.
- Ignoring the size of price moves.
- Trading divergences without testing them.
Try it yourself
- Note the closes and volumes of any share for ten sessions from the exchange website.
- Calculate OBV day by day, starting at zero.
- Compare OBV's direction with the total percentage price change over the ten days.
- Check whether any single day's volume dominated the result, and look for a reason.
Key takeaways
- On-balance volume adds a session's volume to a running total when the close is up and subtracts it when the close is down.
- Rising OBV means more volume has traded on up days than on down days over the period; falling OBV, the opposite.
- OBV ignores how far the price moved. A day up by 0.1% counts its whole volume, just like a day up 8%.
- Every share bought is also sold, so OBV cannot show more buying than selling, or who was buying.
- Divergences between OBV and price are weak signals on their own and need testing.
Check your understanding
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Terms used in this lesson
- On-balance volume
- A running total that adds each session's volume when the close rises and subtracts it when the close falls.
- Trading volume
- The number of shares traded in a period, shown as bars beneath most price charts.
- Momentum oscillator
- An indicator that describes the speed or strength of recent price changes, usually swinging between fixed limits.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.