What it means
OBV is a running total of volume: add the candle's volume when it closes higher than the previous close, subtract it when it closes lower.
The absolute value means nothing; the direction and divergences do.
Why traders use it
If price rises while OBV falls, more volume is trading on down candles than up candles: a possible sign the move is weakening.
Chart examples
Price rises, OBV falls
How to identify it objectively
- 1Plot OBV under price.
- 2Compare swing highs of price with swing highs of OBV.
- 3Price higher high + OBV lower high: bearish divergence.
- 4Price lower low + OBV higher low: bullish divergence.
Bullish use
- 1Price makes a lower low.
- 2OBV makes a higher low.
- 3Wait for a price structure break up.
Bearish use
- 1Price makes a higher high.
- 2OBV makes a lower high or falls.
- 3Wait for a price structure break down.
What confirms it
- Price structure confirms the divergence.
What invalidates it
- OBV turns back in line with price.
How a hypothetical setup is built
Entry
After the divergence, on a structure break in the divergence direction.
Stop
Beyond the last swing.
Target
The prior swing on the other side.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Technical IndicatorsVWAP and Anchored VWAP
- Order FlowDelta and CVD Divergence
- Order FlowExhaustion
- Full guide on The TradeskillCumulative Volume Delta (CVD)
Historical testing
Not tested on The Tradeskill.
Limitations: when it fails
- Volume differs between exchanges and feeds.
- One huge volume candle distorts OBV.
- Divergences can last a long time.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.