Candlesticks + OBV: Tracking Volume Flow

On-Balance Volume (OBV) is one of the oldest volume indicators. Joseph Granville popularized it in his 1963 book, Granville’s New Key to Stock Market Profits. It answers one question:

Has volume been heavier on the days price rose, or on the days it fell?

A volume bar on its own tells you how many shares traded, not which side won. OBV gives each day’s volume a direction, taken from the close, and adds the days up into one line. When the line rises, more volume has traded on up days than on down days. When it falls, the reverse.

Granville’s view was that volume moves before price: traders building a position show up in the volume before the price move is obvious. That steady buying is called accumulation; steady selling is distribution. Treat his view as a reason to watch OBV, not as a rule. Sometimes OBV turns first. Often it simply moves with price.

If you are new to volume itself, start with the Candlesticks + Volume guide, which covers raw and relative volume. This page builds on it.

OBV compares each day’s close with the day before, then adds or subtracts the whole of that day’s volume. There are only three cases:

Take five days, starting the count at zero. Day 1 closes at $50.00. Day 2 closes higher, at $50.80, on 1.2 million shares: OBV goes to +1.2 million. Day 3 closes lower, at $50.40, on 0.8 million: OBV drops to +0.4 million. Day 4 closes unchanged at $50.40: OBV stays at +0.4 million, however many shares traded. Day 5 closes five cents higher, at $50.45, on 2.5 million: OBV jumps to +2.9 million.

Notice Day 5. A five-cent gain added more to OBV than the rest of the week combined. OBV only asks whether the close was higher, never by how much. That is its best-known weakness, and it comes up again below.

OBV’s number has no meaning on its own. It depends entirely on the day the count started. Start it a year earlier and the whole line shifts up or down, but its shape stays the same. A reading of “+40 million” tells you nothing, and it cannot be compared with another stock’s.

What you read is the shape: is OBV rising or falling, and are its highs and lows getting higher or lower? Those peaks and troughs are its swings: a swing high is the top of a bounce, a swing low the bottom of a drop. You read OBV the same way you read price: by its trend and its swings.

The first thing to check is whether OBV is moving the same way as price. When it does, volume is backing the move:

Uptrend, OBV rising: price makes higher highs and higher lows, and OBV does too. More volume is trading on the up days than the down days. The trend has buying behind it. Downtrend, OBV falling: the mirror image. Volume is heavier on the down days, and the selling is real.

A breakout with OBV: when price breaks above a recent high and OBV also makes a new high, the break came with volume on the up days. When price breaks out but OBV stays below its own last high, more volume has traded on down days than on up days since that high, even though price is higher. That does not make it fail, but it is a reason for more caution.

Divergence is when price makes a new low or high and OBV does not. On this page the word means only that: price and OBV disagreeing.

Bullish divergence: price makes a lower low, but OBV makes a higher low. Price fell further, but since the first low more volume has traded on up days than on down days. Bearish divergence: price makes a higher high, but OBV makes a lower high. Since the first high, more volume has traded on down days than on up days.

The chart above shows a bullish divergence. The first decline runs on heavy volume. The bounce brings buying back. The second drop makes a lower price low, but on light volume, so OBV holds above its first low.

Treat divergence as a warning, not a turn. A downtrend can make several divergent lows before it ends, and some never end in a reversal. What divergence does is tell you where a bullish reversal candle deserves a closer look.

A base is a sideways stretch after a decline, where price stops falling but has not started rising. Inside a base, price goes nowhere, but OBV does not have to. If more volume trades on the up days than the down days, OBV climbs while price stays flat.

This is the situation Granville had in mind. A rising OBV in a flat base suggests buyers are taking shares in, and it can come before price breaks out of the top of the base. The chart above shows a related lead: after the light-volume second drop, OBV clears its bounce high a few sessions before price does.

It is a lead, not a promise. OBV can rise through a base that then breaks down. The breakout itself, ideally on a strong close, is still what decides it. For how to read the edges of a sideways market, see Candlesticks + Trading Ranges.

A bullish reversal candle tells you where and when buyers pushed back after a decline. OBV tells you whether volume has been moving their way. Use them together in three steps:

For example, a Hammer at a new low shows buyers rejecting lower prices during the day. If OBV made a higher low beneath it, the candle and the volume read agree. The Hammer day itself often closes below the day before, so OBV can tick down on the candle even when the read is good. Judge the low, not the candle’s own bar.

A Bullish Engulfing or Piercing Pattern ends on a strong up close, so that day’s volume is added to OBV by definition. What matters is whether the volume is heavy next to the recent down days, and the days before count too: one big up day does not undo weeks of OBV falling. A Morning Star spreads the turn over three days, so read OBV across all three and the days after, not just the last candle.

Now take the opposite case: a Hammer at a new low while OBV is also at a new low, and still falling. Volume is still heavier on the down days. The candle may still work, but it is pushing against the volume, not with it.

It can’t tell a big move from a tiny one. A stock that closes one cent higher adds its whole day’s volume, exactly as a stock that closes 5% higher does. On a choppy stock, small up and down closes can swing OBV with almost no change in price.

One huge day can distort it for months. An earnings release, a stock joining or leaving an index, or a news day can trade many times the normal volume. Whichever way that day closes, it moves OBV by a large step that stays in the running total, and later days take a long time to outweigh it. Check whether a jump in OBV comes from a single bar.

It ignores what happened during the day. OBV only compares today’s close with yesterday’s. A stock that gaps up at the open and sells off all day, closing near its low but still above yesterday’s close, counts as a full up day.

It says nothing about where in the bar the close fell. A close at the top of the day’s range and a close at the bottom count the same if both are higher than yesterday’s. Weighing volume by where the close falls is what the Accumulation/Distribution line does instead.

It can’t call the turn. A divergence or a rising OBV says the volume has shifted. It does not say when, or whether, price will follow. The candle and its confirmation do the timing.

OBV doesn’t make a candlestick pattern work. It tells you whether volume has been arriving on the up days or the down days, and whether that agrees with the candle.

So when you check OBV behind a bullish reversal candle, ask one question: “Has volume started to favor the up days?” A lower price low with a higher OBV low, and OBV climbing past its last swing high after the confirmation, says yes. OBV making new lows with price says not yet.

This is one of seventeen context guides in this series: Candlesticks + Moving Averages for trend structure, Candlesticks + RSI for how stretched a move is, Candlesticks + MACD for momentum, Candlesticks + ADX for trend strength, Candlesticks + Volume for conviction, Candlesticks + Accumulation/Distribution for where the close fell, Candlesticks + Volume Spread Analysis for reading each bar’s effort and result, Candlesticks + Volume Profile for the prices where volume traded, Candlesticks + Anchored VWAP for the average price paid since a turn, Candlesticks + Fibonacci for retracement levels, Candlesticks + ATR for volatility, Candlesticks + Bollinger Bands for volatility bands around an average, Candlesticks + Multi-Timeframe Analysis for the weekly trend, Candlesticks + 52-Week High/Low for where price sits in its yearly range, Candlesticks + Trend Channels for where in the trend price sits, and Candlesticks + Trading Ranges for sideways markets. New to candles? Start with the candlestick basics guide.