## OBV: An Essential Tool Every Trader Must Know

In the trading world, the phrase "volume tells the story" is not just a slogan but a market truth. Long-lasting price trends require support from trading volume. When volume is lacking, those trends are more prone to collapse. To address this, Joseph Granville developed **On Balance Volume (OBV)** in 1963, a technical analysis tool that reveals what the smart money is really doing.

## What is OBV and Why Is It Important

On Balance Volume is a momentum indicator that studies trading volume behavior. Unlike just looking at raw volume numbers, OBV combines the relationship between closing prices and volume in an accumulated manner, allowing traders to see whether the market is accumulating or distributing assets.

The magic of OBV lies in its ability to signal potential price reversals before they happen. When OBV gives a signal and the price moves in the opposite direction, it serves as a warning that "the balance is shifting."

## How OBV Works

OBV operates on three simple principles:

**If today's closing price is higher than yesterday** → Add volume (confirming buying)

**If today's closing price is lower than yesterday** → Subtract volume (confirming selling)

**If today's closing price is the same as yesterday** → No change (neutral)

The calculation formulas are as follows:

- OBVt = OBVt-1 + Volumet (when closing price is positive)
- OBVt = OBVt-1 - Volumet (when closing price is negative)
- OBVt = OBVt-1 + 0 (when closing price is unchanged)

Where OBVt is the current accumulated value, OBVt-1 is the previous accumulated value, and Volumet is the current period's volume.

## Real Example Calculation: GOOG in October-November 2023

Applying the formula to real data yields the following table:

| Date | Price | Volume | +/- | OBV |
|-------|--------|---------|-----|--------|
| 10/02/23 | 135.17 | 19,210,394 | + | 19,210,394 |
| 10/03/23 | 133.30 | 19,628,736 | - | -418,342 |
| 10/04/23 | 136.27 | 22,847,987 | + | 22,429,645 |
| 10/05/23 | 135.99 | 15,922,944 | - | 6,506,701 |
| 10/06/23 | 138.73 | 20,826,683 | + | 27,333,384 |
| 10/25/23 | 126.67 | 58,796,067 | - | -34,913,701 |

You can see that during this period, the price dropped sharply, and OBV continued to decline, confirming strong selling pressure.

## Using OBV to Confirm Trends

When prices rise but OBV does not follow or rises less, it indicates weakness in the upward move due to lack of volume support. Conversely, if prices and OBV both rise, the uptrend is strong.

Swing traders can use this signal to buy on pullbacks within an uptrend supported by OBV, aiming to profit from continued price movements.

## Detecting Reversals with OBV Divergence

Exciting moments occur when OBV conflicts with price (Divergence):

**Scenario 1**: Price makes a new high but OBV does not → Weakening momentum, potential reversal

**Scenario 2**: Price makes a new low but OBV does not → Weakening downside, potential reversal

Traders can employ pullback/throwback strategies when divergence appears.

## Combining OBV with Moving Averages (MA)

Using OBV alone may not suffice; combining it with other tools like EMA 25 enhances analysis.

For example, in a 1-hour JPYUSD chart: During a downtrend, price stays below EMA25, and OBV declines. When OBV stops making new lows (Divergence) and price begins to bounce and attempt to break above EMA25, it signals a potential buy entry, with a stop loss at the previous low.

## Combining OBV with Bollinger Bands

Bollinger Bands define a price channel where the price "should" stay within. When combined with OBV, the signals become clearer.

For instance, Microsoft stock (1 day): Previously, the price made higher highs consistently, and OBV rose strongly, indicating a solid uptrend. When OBV diverged (not making new highs while the price tried to go higher) and the price hit the upper Bollinger Band and reversed, it became a clear sell signal. A stop loss is placed at the previous high.

## Combining OBV with EMA 25

Besides trend lines, EMA breakouts can serve as confirmation signals. After observing OBV divergence, traders can wait for the price to break above EMA for a higher-confidence entry.

## Summary: Why OBV Should Be in Every Trader’s Toolbox

On Balance Volume is not just a pretty indicator on the chart; it’s a real market sentiment reader. It reveals what’s really happening behind price changes.

Accumulated trading volume indicates who has the power in the market, who is active, and who is losing strength. When traders understand OBV well, it’s like having a market mind-reading program.

Using OBV alongside trend indicators like MA or Bollinger Bands is not about stacking indicators blindly but about building confidence in decision-making. For traders seeking high accuracy, OBV is a tool that should not be overlooked.