Understanding On-Balance Volume (OBV)

On-Balance Volume (OBV) is a momentum-based volume indicator that measures buying and selling pressure by tracking cumulative volume flow. Developed by Joe Granville in the 1960s, OBV operates on the principle that volume precedes price movement, making it a leading indicator of potential trend changes.

The core concept behind OBV is to quantify the relationship between volume and price. It adds volume on days when the closing price rises and subtracts volume on days when the closing price falls. If the closing price remains unchanged, the OBV value stays the same. This creates a running total that forms a line chart, which can be compared to the asset's price chart.

OBV doesn't measure absolute volume levels but rather the sentiment reflected by volume trends. When OBV rises, it indicates that buyers are in control and accumulating the asset. Conversely, when OBV declines, it suggests that sellers dominate the market and are distributing the asset. Divergences between OBV and price can signal potential reversals or continuations.

A bullish divergence occurs when price forms lower lows while OBV forms higher lows, hinting at underlying buying pressure. A bearish divergence happens when price makes higher highs but OBV forms lower highs, signaling hidden selling pressure. These divergences often precede trend changes, as volume shifts before price reacts.

Traders also watch for OBV breakouts or breakdowns from key levels. When OBV breaks above previous highs, it confirms bullish momentum. When it breaks below previous lows, it confirms bearish momentum. These signals help validate price movements and filter out false breakouts.

OBV also incorporates the concept of accumulation and distribution phases. During accumulation, informed traders buy the asset quietly, increasing OBV without significant price movement. During distribution, these traders sell gradually, causing OBV to decline while price may still be rising due to retail participation.

It is important to note that OBV does not provide absolute buy or sell signals