What is On-Balance Volume (OBV)?
On-Balance Volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in price. Developed by Joe Granville, OBV attempts to relate price changes to volume. It’s based on the idea that volume precedes price; therefore, OBV can signal potential reversals or continuations of trends. It's a cumulative volume indicator, meaning it adds volume on up days and subtracts it on down days. This creates a running total that can be used to identify divergences and confirm trends.
How it Works
OBV calculates a cumulative volume total. When the closing price is higher than the previous day’s close, the day’s volume is added to the running total. Conversely, when the closing price is lower, the volume is subtracted. The resulting OBV line fluctuates around a zero baseline. A rising OBV suggests buying pressure is dominant, while a falling OBV indicates selling pressure. Significant changes in OBV often precede significant price changes.
Trading Signals
OBV generates signals through several patterns. Divergences occur when price makes new highs (or lows) but OBV doesn’t, suggesting a potential trend reversal. Confirmations happen when OBV moves in the same direction as the price, strengthening the existing trend. Breakouts in OBV can signal the start of a new trend. Look for OBV to confirm price breakouts for higher probability trades.
Basic Settings
TradingView’s default OBV settings are generally sufficient. The primary setting is the Volume source, which should correspond to the volume data for the asset you’re analyzing. You can adjust the Period, though the standard setting of 1 is most common. Experimenting with different volume types (e.g., tick volume) may provide slightly different signals. Remember to backtest any setting changes. This is for educational purposes only, not financial advice.