Volume Indicators
Volume indicators tell you about buying and selling pressure. Price moves confirmed by volume are more reliable than those without.
OBV (On Balance Volume)
What it is: A cumulative volume indicator that adds volume on up days and subtracts volume on down days.
Calculation
If Close > Previous Close:
OBV = Previous OBV + Volume
If Close < Previous Close:
OBV = Previous OBV - Volume
If Close = Previous Close:
OBV = Previous OBV
The Power of OBV
OBV reveals what smart money is doing:
- Rising OBV = Accumulation (buying pressure)
- Falling OBV = Distribution (selling pressure)
Signals
BULLISH DIVERGENCE: OBV rising while price falling
→ Smart money accumulating despite price drop
→ Score: +2 bullish
BEARISH DIVERGENCE: OBV falling while price rising
→ Distribution occurring despite price rise
→ Score: +2 bearish
CONFIRMATION: OBV trend matches price trend
→ Score: +0.5 (confirms direction)
Divergence Examples
Bullish Divergence
Price: $50 → $48 → $45 (falling)
OBV: 100 → 120 → 150 (rising)
Interpretation: Smart money is buying the dip
Action: Watch for reversal, prepare to buy
Bearish Divergence
Price: $50 → $52 → $55 (rising)
OBV: 100 → 90 → 70 (falling)
Interpretation: Smart money is selling into strength
Action: Be cautious, consider taking profits
OBV Confirmation
When OBV confirms price action, the move is more reliable:
| Price | OBV | Meaning |
|---|---|---|
| Rising | Rising | Strong uptrend (confirmed) |
| Falling | Falling | Strong downtrend (confirmed) |
| Rising | Falling | Weak rally (divergence) |
| Falling | Rising | Weak decline (divergence) |
Why Volume Matters
"Volume precedes price" - Joseph Granville (OBV creator)
Volume often changes direction before price does. This makes OBV a leading indicator that can warn you of upcoming reversals.
Best for: Confirming price moves with volume and detecting divergences
Volume Analysis Tips
High Volume Breakouts
When price breaks through resistance with high volume, the breakout is more likely to succeed:
✅ Good breakout: Price breaks resistance + Volume 2x average
❌ Weak breakout: Price breaks resistance + Volume below average
Volume Climax
Extremely high volume after a long trend can signal exhaustion:
- Buying climax: Very high volume at top → Potential reversal
- Selling climax: Very high volume at bottom → Potential reversal
Volume Dry-Up
Low volume during a pullback is bullish:
Uptrend → Pullback on low volume → Continuation likely
Summary Table
| Indicator | Signal Type | Bullish Score | Bearish Score |
|---|---|---|---|
| OBV Bullish Divergence | Divergence | +2 | - |
| OBV Bearish Divergence | Divergence | - | +2 |
| OBV Confirmation (up) | Confirmation | +0.5 | - |
| OBV Confirmation (down) | Confirmation | - | +0.5 |
Next: Scoring System →