OBV (On-Balance Volume)
Volume-based momentum indicator that tracks cumulative buying and selling pressure by analyzing the relationship between price movements and volume flow
Technical Overview
On-Balance Volume (OBV) is a volume-based momentum indicator developed by Joseph Granville that tracks cumulative volume flow to predict price movements. The core principle behind OBV is that volume precedes price – when institutional money flows into or out of a security, it creates detectable volume patterns before significant price moves occur.
Key Insight: OBV adds volume on up days and subtracts volume on down days, creating a running total that reveals whether money is flowing into (accumulation) or out of (distribution) a security. Divergences between OBV and price often provide early warning signals for trend changes and breakout confirmations.
How OBV Works
What OBV Actually Measures
Think of OBV as a “money flow detector” that answers: “Are institutions accumulating or distributing this security, and what does that mean for future price direction?”
Step 1: Compare Prices
Check if today’s close is higher, lower, or equal to yesterday’s
Step 2: Add or Subtract
Add volume on up days, subtract on down days
Step 3: Track Trend
Monitor cumulative OBV for institutional flow patterns
Reading OBV Signals
Institutional buying, bullish pressure building
Balanced buying/selling, trend uncertainty
Institutional selling, bearish pressure mounting
Key OBV Components
Volume Flow Direction
Price comparison determines whether volume is added (up day) or subtracted (down day) from the cumulative OBV total
Cumulative Total
Running sum of directional volume that creates the OBV line, showing long-term accumulation or distribution patterns
Trend Analysis
OBV trend direction reveals institutional sentiment – rising OBV suggests accumulation, falling OBV indicates distribution
Divergence Signals
When OBV and price move in opposite directions, it often signals potential trend reversals or continuation patterns
Strategy Integration
5-Day Predictions
How OBV Powers Short-Term Volume Analysis:
- Breakout Validation: Rising OBV confirms genuine breakouts while declining OBV warns of false moves
- Divergence Detection: Price/OBV divergences signal potential 5-day reversal opportunities
- Volume Momentum: OBV acceleration indicates strengthening institutional participation in trends
- Entry Timing: OBV breakouts often precede price breakouts, providing early entry signals
- Risk Assessment: Declining OBV during rallies suggests reduced confidence and higher reversal risk
Real Impact: OBV helps MCTM distinguish between genuine momentum moves and low-conviction price movements
1-Year Predictions
How OBV Enhances Long-Term Institutional Flow Analysis:
- Secular Trends: Long-term OBV patterns reveal major institutional accumulation or distribution cycles
- Market Structure: Monthly OBV analysis identifies changing institutional sentiment and sector rotation
- Confirmation Tool: OBV validates long-term economic and technical signals with volume-based evidence
- Portfolio Signals: Major OBV trend changes suggest strategic asset allocation adjustments
- Cycle Analysis: OBV helps identify market cycle phases through institutional money flow patterns
Real Impact: OBV provides crucial institutional sentiment context for MFMM’s long-term market predictions
OBV Signal Interpretation
Why Use OBV in Trading?
- Provides early warning signals through volume analysis before price moves
- Identifies institutional accumulation and distribution patterns effectively
- Confirms breakouts and validates trend strength with volume evidence
- Detects divergences that often precede significant price reversals
- Works across all timeframes from intraday to long-term analysis
- Simple calculation makes it reliable and widely applicable indicator
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