What is On-Balance Volume (OBV)? Definition, Formula, and Example
On-Balance Volume (OBV) is a cumulative momentum indicator that adds a session's full volume when the close is higher than the prior close and subtracts it when lower, creating a running total that reveals whether volume is flowing into or out of a security.
What is On-Balance Volume (OBV)?
On-Balance Volume (OBV) is a cumulative momentum indicator developed by Joseph Granville in 1963 that adds a session's entire volume on up days and subtracts it on down days, producing a running total. Granville's thesis: volume precedes price. When institutions accumulate a stock, OBV rises before price breaks out. When distribution begins, OBV falls before the selloff becomes obvious on a price chart.
How OBV is Calculated
The calculation is deterministic and requires only three data points per session:
If Close > Prior Close: OBV = Prior OBV + Current Volume
If Close < Prior Close: OBV = Prior OBV − Current Volume
If Close = Prior Close: OBV = Prior OBV (unchanged)The absolute level of OBV is meaningless — it depends entirely on the arbitrary starting date. Only the trend and divergences relative to price carry analytical value.
Worked Example
Over five sessions for AAPL:
| Day | Close | Change | Volume | OBV |
|---|---|---|---|---|
| 1 | $172.00 | — | — | 0 |
| 2 | $175.40 | ↑ | 82M | +82M |
| 3 | $174.10 | ↓ | 61M | +21M |
| 4 | $176.80 | ↑ | 95M | +116M |
| 5 | $176.20 | ↓ | 40M | +76M |
Despite a modest net price gain of $4.20, OBV ended at +76M. The dominant buying sessions (days 2 and 4) attracted nearly twice the volume of the selling sessions — bullish accumulation signal.
Divergence in action: If AAPL's price makes a new 52-week high on day 6 but OBV remains below its own 52-week high, that bearish divergence warns the price move lacks volume conviction.
When Traders Use OBV
OBV is most effective as a confirmation and divergence tool, not a standalone signal:
- Trend confirmation: Price and OBV both making higher highs and higher lows confirm a healthy uptrend. MACD crossovers confirmed by rising OBV have a higher success rate than price-only signals.
- Breakout validation: An OBV breakout above a multi-month resistance level before the price breakout is a leading signal to watch closely.
- Distribution warning: Stock price grinds to new highs while OBV trends lower — classic institutional selling into retail buying.
OBV pairs well with Bollinger Bands on a squeeze setup: when price contracts and OBV trends strongly in one direction, the band expansion often follows in that direction.
Limitations and Common Misconceptions
OBV weights every session's volume identically regardless of how much the price moved. A session that closes up $0.01 on 500M shares adds the same to OBV as a session that closes up 5% on 500M shares — the indicator cannot distinguish between a gap-up reversal and a genuine breakout when volume is identical.
The indicator also ignores intraday price action entirely. A stock that opens down 4%, recovers to close up $0.05, and trades 200M shares will add the full 200M to OBV because the close was fractionally higher. This makes OBV unreliable on heavily manipulated or highly volatile tickers where close vs. prior close tells little about true sentiment.
Finally, OBV is not normalized. Comparing OBV readings between two different stocks, or the same stock before and after a stock split, produces meaningless results.