On Balance Volume Formula: Simple Breakdown with Example
Understanding the On Balance Volume (OBV) formula is essential for traders who want to go beyond the basics. While the OBV line looks simple on the chart, it’s backed by a consistent volume-based calculation that reflects buying and selling pressure.
In this post, we’ll explain the OBV formula in simple terms and walk through a clear example.
✅ OBV Formula (Standard Definition)
The On Balance Volume formula is calculated as follows:
- If today’s close > yesterday’s close →
OBV = Previous OBV + Today’s Volume - If today’s close < yesterday’s close →
OBV = Previous OBV − Today’s Volume - If today’s close = yesterday’s close →
OBV = Previous OBV (unchanged)
The OBV value is a cumulative total, starting from a base (often 0 or a defined point in the charting platform).
✅ Example: OBV Formula in Action
Let’s walk through a 4-day example:
| Day | Close Price | Volume | OBV |
|---|---|---|---|
| 1 | $100 | 10,000 | 0 |
| 2 | $102 | 12,000 | 0 + 12,000 = 12,000 |
| 3 | $101 | 8,000 | 12,000 − 8,000 = 4,000 |
| 4 | $101 | 9,000 | No change = 4,000 |
This creates a line that rises or falls based on volume and price movement, not price alone.
✅ Why the OBV Formula Works
- Captures market sentiment through volume shifts
- Offers a leading indication of potential breakouts or reversals
- Helps track smart money accumulation or distribution
By comparing OBV to price action, traders spot divergences that often precede price movement.
✅ OBV vs Price Example
If price is trending upward and OBV is rising faster than price:
- Suggests strong participation behind the move
- Bullish confirmation
If OBV falls while price is flat:
- Could be hidden selling pressure
- Bearish divergence signal
✅ Final Thoughts
The On Balance Volume formula is easy to learn, yet powerful in application. It turns raw volume data into a visual indicator of buying/selling pressure, helping traders anticipate market direction.
Use this understanding to make more informed decisions and avoid chasing price moves without confirmation.
✅ FAQs
1. Is OBV based on actual volume numbers?
Yes. It uses raw volume data from each trading session.
2. Is the OBV number itself important?
No. What matters is the direction and shape of the OBV line.
3. Can I use OBV without understanding the formula?
Yes, but knowing the formula helps you interpret signals better.
4. Is OBV cumulative over time?
Yes, it builds upon the previous value each day.
5. Can I reset OBV to start from a different value?
Some platforms allow this for custom charting or analysis zones.
