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On-Balance Volume (OBV)

On-Balance Volume (OBV)

On-Balance Volume (OBV), is an indicator that displays cumulative volume information, and helps make it easier for traders to confirm or deny the strength of a given price trend.  Traders can look for divergences between On-Balance Volume and price to predict price movements or use On-Balance Volume trends to confirm price trends.

Indicator type

Volume Indicator
Provides confirmation for a price trend and warns about possible trend reversals.


Leading Indicator
Indicators that tend to signal a potential change in the trend before the price’s direction actually changes.
Note: Leading indicators are used to warn traders of a potential price reversal, not to confirm them. Warnings provided by leading indicators are not always accurate and should be confirmed using other non-momentum indicators.

 

Market conditions

On-Balance Volume (OBV) is most effective when used in the following market conditions:

Bullish
Bearish
Neutral
YES
YES
YES

On-balance volume (OBV) components

The On Balance Volume (OBV) line is simply a running total of positive and negative volume.  A period's volume is positive when the close is above the prior close. A period's volume is negative when the close is below the prior close. 

OBV

Indicator signals: what traders look for

Traders look for an On-Balance Volume line that is moving in the same direction as price.  Since volume indicators often lead price action, traders also monitor reversals in On-Balance Volume, since they can serve as an alert of a potential price reversal.

  • Confirmation - On-Balance Volume that follows the trend’s direction signifies potential trend strength. 
  • Divergence - On-Balance Volume that does not follow the trend’s direction signifies potential trend weakness.
OBV

Bullish signals

Bullish confirmation

An uptrend in price is confirmed when the On-Balance Volume line moves higher over the same time period as the price advance.  This signals that the advance is being fueled by true bullish commitment on the part of traders.

obv

Bullish divergence

A potential upside price reversal alert is signaled when On-Balance Volume diverges from a price downtrend and starts to move up, in disagreement with the falling price action.  Anytime price clearly declines over a given period of time and OBV does not confirm by also moving lower during that same time, it can serve as a useful alert to traders that the down move in price may be losing momentum.

obv

Bearish signals

Bearish confirmation

A downtrend in price is confirmed when the On-Balance Volume line moves lower over the same time period as the price decline.  This signals that the decline is being fueled by true selling pressure.

obv

Bearish divergence

A potential downside trend reversal alert is signaled when On-Balance Volume diverges from a price uptrend and starts to move down, in disagreement with the rising price action.  Anytime price clearly advances over a given period of time and OBV does not confirm by also moving higher during that same time, it can serve as a useful alert to traders that the up move in price may be losing momentum.

obv

Signals in sideways markets

During periods of sideways price movements, On-Balance Volume may provide clues regarding the direction of the ultimate price break outside the trading range.  This can happen in one of several ways.

A clear uptrend or downtrend in On-Balance Volume that forms while price remains in a trading range can often be an early warning of the ultimate price trend as it can imply building bullishness or bearishness among traders.  Likewise, a break of a support line drawn on the On-Balance Volume indicator itself can portend of an impending a break of price support, while a break of a resistance line drawn on the On-Balance Volume indicator can hint of an impending price breakout above its resistance line.

obv

Summary

Volume is said to reflect the commitment on the part of traders.  Because On-Balance Volume relates volume to price movements, many traders believe that it can offer great insights into the level of bullishness or bearishness that exists or is building among traders regarding a given stock or other asset.

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Schwab does not recommend the use of technical analysis as a sole means of investment research.

The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern or investment strategy.

Past performance is no guarantee of future results.

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