In the previous topic we learned why volume matters — it confirms price moves and reveals institutional activity.
OBV — On Balance Volume — takes raw volume data and transforms it into a cumulative line that reveals whether money is flowing INTO or OUT OF an asset.
Developed by Joseph Granville in 1963 — OBV was one of the first indicators to use volume as a predictive tool.
The calculation is beautifully simple:
If today’s close is HIGHER than yesterday’s close:
Add today’s volume to the OBV total.
If today’s close is LOWER than yesterday’s close:
Subtract today’s volume from the OBV total.
If today’s close equals yesterday’s close:
OBV stays the same.
The result is a cumulative line that rises when buying volume dominates and falls when selling volume dominates.
Example:
Day 1: OBV = 1,000,000
Day 2: Price closes higher. Volume = 500,000. OBV = 1,500,000.
Day 3: Price closes lower. Volume = 200,000. OBV = 1,300,000.
Day 4: Price closes higher. Volume = 800,000. OBV = 2,100,000.
OBV should confirm price direction.
Rising OBV + Rising price = Healthy uptrend
Volume flowing in supports the price rise. Institutional buying confirmed.
Falling OBV + Falling price = Healthy downtrend
Volume flowing out confirms the decline. Institutional selling confirmed.
Like RSI divergence — OBV divergence is a powerful leading signal.
Bullish OBV Divergence:
Price making lower lows.
OBV making higher lows — or rising while price falls.
What it means:
Despite falling price — buying volume is stronger than selling volume.
Smart money is accumulating quietly while price appears weak.
Major reversal upward likely.
Granville’s famous observation:
“Volume precedes price.”
OBV often turns upward BEFORE price does — giving early warning of reversals.
Bearish OBV Divergence:
Price making higher highs.
OBV making lower highs — or falling while price rises.
What it means:
Despite rising price — selling volume is stronger than buying volume.
Smart money distributing — selling into retail buying.
Major reversal downward likely.
OBV itself forms trends — just like price.
OBV in uptrend:
OBV making higher highs and higher lows.
Confirms price uptrend is healthy.
OBV in downtrend:
OBV making lower highs and lower lows.
Confirms price downtrend is healthy.
OBV breaking trend:
OBV breaks its own trendline before price breaks its trendline.
Early warning signal — price trend about to change.
OBV is particularly useful for confirming triangle and flag breakouts.
Before breakout:
Price consolidating in pattern.
OBV rising during consolidation = accumulation happening.
Bullish breakout likely.
OBV falling during consolidation = distribution happening.
Bearish breakdown likely.
At breakout:
OBV should spike in direction of breakout.
No OBV spike = suspicious breakout — potential fake.
Strategy 1 — OBV Divergence:
Spot divergence between price and OBV.
Wait for price action confirmation.
Enter in direction of OBV signal.
Strategy 2 — OBV Trend Confirmation:
Only trade long when OBV is in uptrend.
Only trade short when OBV is in downtrend.
Simple filter that keeps you on right side of institutional money flow.
Strategy 3 — OBV Breakout:
During consolidation — watch if OBV rises or falls.
Direction of OBV predicts direction of eventual breakout.
Position ahead of the break.
Absolute values are meaningless:
OBV value itself means nothing. Only the direction and trend of OBV matters.
All volume treated equally:
A massive volume day and an average volume day both contribute proportionally to their actual volume. OBV does not weight importance of specific days differently.
Works best in trending markets:
In choppy sideways markets — OBV can generate confusing signals.
The most important OBV insight:
When OBV and price diverge — OBV is usually right.
OBV rising while price flat:
Accumulation phase. Smart money buying.
Price will follow OBV higher.
OBV falling while price flat:
Distribution phase. Smart money selling.
Price will follow OBV lower.
When you see Bitcoin price moving sideways but OBV rising steadily — that is one of the most bullish signals available. A major move up is building quietly.
In the next topic we will study Volume Profile — the most sophisticated volume tool used by professional traders.