On-Balance Volume (OBV) is a cumulative trading-volume line based on the direction of closing prices. This article covers the standard formula, trend comparisons and divergence, with reference to StockCharts ChartSchool. OBV is a charting tool, not evidence of an investment outcome.
How is OBV calculated?
Compare the current period’s closing price with the previous period’s close, then add, subtract or leave the current period’s volume out of the previous OBV value:
- Current close is higher: add the current period’s trading volume to the previous OBV.
- Current close is lower: subtract the current period’s trading volume from the previous OBV.
- Closes are equal: leave the previous OBV unchanged.
OBV therefore accumulates volume according to the direction of the closing price. The speaker emphasizes comparing the price line with OBV rather than interpreting OBV’s cumulative number on its own. These three cases match the standard calculation described in StockCharts ChartSchool’s OBV guide.
Read OBV alongside the price trend
The speaker suggests comparing the direction and slope of price and OBV. If they move in the same direction, volume may support the interpretation that the move has participation behind it. That alignment does not guarantee that the price will continue in the same direction.
If price continues to rise while OBV fails to make a higher high or begins to weaken, the speaker treats it as a possible warning that support is fading. Conversely, if price moves within a range while OBV is flat or moves differently, read that as context for the chart—not proof that a reversal will occur.
Divergence between price and OBV
In the video, divergence describes a period when price and OBV do not show consistent directions. The examples discussed are:
- Bullish divergence: price makes lower lows while OBV makes higher lows or does not weaken as much. The speaker treats this as something to watch, not an instruction to buy.
- Bearish divergence: price makes higher highs while OBV weakens or makes lower highs. This is a mismatch to investigate further, not an instruction to sell.
The speaker stresses that divergence can produce false signals. They suggest waiting for price behaviour or confirmation from price action before drawing a conclusion, and caution against buying or selling simply because divergence appears.
Limitations highlighted by the speaker
- OBV is not a magic tool and should not be used alone to forecast price.
- An unusually large volume spike can move the OBV line sharply and make it harder to interpret.
- The speaker cautions about short timeframes because volatility and trading volume can make direction unstable. This is the speaker’s view, not a universally suitable timeframe for every investor.
- Video chart examples illustrate past patterns; they do not prove that the same pattern will recur or produce the same result.
Other limitations to check when using OBV
Because OBV is cumulative, its value depends on the starting point of the data series and on how price data have been adjusted. Focus on the line’s direction or change during the same period as price rather than comparing absolute OBV values across different securities. Divergence is a mismatch that can prompt a question; it is not evidence that price will reverse. StockCharts explains the standard formula and interpretation limits in its OBV guide.
If you test the indicator, define the rules for reading its signals in advance. Review examples in rising, falling and sideways markets, and distinguish results from fees and unusual changes in volume. This article explains a charting tool; it is not a recommendation to buy or sell securities.
Related video: “On Balance Volume (OBV)” — Cwayinvestment. The article discusses the formula, trend comparisons and divergence, and checks the standard formula and limitations against StockCharts ChartSchool.
Original video: Watch the source video on YouTube.