On Balance Volume (OBV) is a popular technical indicator that measures buying and selling pressure using trading volume and price movement. It helps traders understand whether volume is supporting a price trend or signaling a potential reversal. Developed by Joseph Granville, OBV is widely used to confirm trends and identify early signs of market momentum shifts.

How OBV Works: The OBV indicator adds volume on days when the closing price is higher than the previous dayís close and subtracts volume when the price closes lower. The cumulative total forms the OBV line, which is then compared with the stockís price movement. When both OBV and price move in the same direction, it confirms the strength of the trend. Conversely, when the OBV diverges from price action, it may signal weakening momentum or a possible trend reversal.

Trading Interpretation: A rising OBV indicates that volume is increasing on up days, suggesting strong buying interest and potential continuation of an uptrend. A falling OBV implies selling pressure, hinting at a possible downtrend. Divergencesówhen price rises but OBV fallsócan serve as early warnings that the trend might reverse soon. However, traders should use OBV alongside other indicators such as moving averages or RSI to avoid false signals.

Practical Use and Limitations: OBV is most effective in trending markets where volume plays a key role in driving prices. In sideways markets, the indicator may produce mixed or misleading signals. While OBV offers valuable insights into market sentiment, it should not be used as a standalone trading tool. Investors should always combine it with proper risk management and other forms of analysis to make informed trading decisions.