On Balance Volume (OBV) was developed by Joe Granville in 1963 with a simple premise: volume precedes price. OBV is a cumulative indicator โ it adds volume on up days and subtracts volume on down days. When OBV rises, buyers are in control. When OBV falls, sellers dominate.
OBV Calculation
If Close > Previous Close: OBV = Previous OBV + Current Volume
If Close < Previous Close: OBV = Previous OBV โ Current Volume
If Close = Previous Close: OBV = Previous OBV (unchanged)
OBV and Price Confirmation
| Price | OBV | Signal | Action |
|---|---|---|---|
| Rising | Rising | Confirmed uptrend | Stay long โ strong trend |
| Rising | Falling | Bearish divergence | Caution โ distribution likely |
| Falling | Falling | Confirmed downtrend | Stay out or short |
| Falling | Rising | Bullish divergence | Accumulation likely โ watch for reversal |
OBV Divergence โ Anticipating Reversals
Bullish OBV Divergence (Smart Money Accumulation):
Price is making lower lows but OBV is making higher lows
Meaning: Institutions are buying the dip while retail is selling
Signal: Price reversal upward likely
Price is making lower lows but OBV is making higher lows
Meaning: Institutions are buying the dip while retail is selling
Signal: Price reversal upward likely
Bearish OBV Divergence (Smart Money Distribution):
Price is making higher highs but OBV is making lower highs
Meaning: Institutions are selling into the rally while retail is buying
Signal: Price reversal downward likely
Price is making higher highs but OBV is making lower highs
Meaning: Institutions are selling into the rally while retail is buying
Signal: Price reversal downward likely
OBV Breakout Confirmation
OBV is extremely valuable for confirming price breakouts on NSE stocks:
Valid Breakout: Price breaks resistance AND OBV breaks its own resistance simultaneously โ High-confidence breakout, enter long
False Breakout: Price breaks resistance BUT OBV does not confirm โ Low-confidence โ wait or reduce position size
False Breakout: Price breaks resistance BUT OBV does not confirm โ Low-confidence โ wait or reduce position size
Before trading any NSE stock breakout, always check if OBV is confirming. A breakout on rising OBV has historically been 2โ3ร more reliable than a breakout on declining OBV.
How to Use OBV on Momentum IQ
Add OBV to your strategy as a confirmation filter:
- Generate signal from primary indicator (EMA crossover, Supertrend)
- Check OBV: Is it trending in the same direction as the signal?
- Only take the trade if OBV confirms the signal direction
- Result: Significantly fewer false signals, especially on mid-cap NSE stocks
Limitations
- OBV is cumulative โ the absolute value is meaningless, only the trend matters
- All volume is treated equally โ a 10-crore trade has the same weight as a 10-lakh trade
- Less reliable on F&O where hedging can distort volume patterns
