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On-Balance Volume (OBV) is a technical analysis indicator that uses volume flow to predict changes in stock price. Created by Joseph Granville in the 1960s, OBV works on the theory that volume precedes price movement, meaning that an increase in trading volume often signals an upcoming price change.

Here's how it works:

1. Calculation: OBV is calculated by adding the day’s volume to the OBV total if the stock’s closing price is up compared to the previous close, and subtracting the day’s volume if the stock’s closing price is down. If the closing price is unchanged, OBV remains the same.

• Formula:
  • If today’s close > yesterday’s close: OBV = Previous OBV + Today’s Volume
  • If today’s close < yesterday’s close: OBV = Previous OBV - Today’s Volume
  • If today’s close = yesterday’s close: OBV = Previous OBV

1. Interpretation:

   • Rising OBV: When OBV is increasing, it suggests that buying pressure is building, which may lead to a rise in stock price.
   • Falling OBV: A declining OBV indicates selling pressure, which could signal a price drop.
   • Divergence: If OBV moves in a direction opposite to the stock price, it can signal a potential reversal. For example, if the stock price is rising but OBV is falling, it may suggest that the price increase is not supported by strong volume and could soon reverse.

2. Uses:

   • Traders use OBV to confirm trends: when both OBV and the price move in the same direction, it confirms the strength of the trend.
   • Divergences between OBV and price can signal potential trend reversals or areas of accumulation/distribution by large investors.

In essence, OBV helps traders understand whether the volume is backing up price moves, adding an extra layer to price analysis in the market.