On-Balance Volume (OBV) was developed by Joseph Granville in the 1960s. The calculation is simple: if today's closing price is higher than yesterday's, add the entire day's volume to a running total; if it is lower, subtract it. The resulting cumulative line moves with price on up-days and against it on down-days, creating a volume-based trend indicator.
The key use of OBV is divergence analysis. If price is making new highs but OBV is failing to confirm — because volume has been declining on up-days — it suggests that the rally lacks underlying buying conviction and may be at risk of reversing. Conversely, if price is falling to new lows but OBV is holding above its prior low, it suggests that selling is not increasing with each decline — a potential sign of absorption and recovery ahead.
OBV is best used as a confirmation tool rather than a standalone signal. It is most reliable in liquid, heavily traded markets where volume data is meaningful. In less liquid markets or during periods of high algorithmic trading, raw volume figures can be misleading, reducing OBV's interpretive value.