Using On-Balance Volume for Trend Confirmation and Divergence
Summary
The article explains On-Balance Volume (OBV) as a running total that adds a period's volume when its close is above the previous close and subtracts volume when the close is lower. It advises focusing on the line's direction and comparing it with price, rather than interpreting its absolute level. The proposed uses are confirming trends when price and OBV reach corresponding highs or lows, and watching for divergence when they do not. A rising price with weakening OBV is framed as a possible bearish divergence, while falling or sideways prices with rising OBV may suggest bullish divergence. The article proposes using these patterns to inform profit-taking, short setups, or potential long entries after a range breakout. It cautions that OBV does not time entries precisely and suggests pairing it with trend indicators. These are qualitative trading heuristics; the document supplies no backtest, quantified accuracy, or evidence that divergence reliably identifies institutional activity.
Key ideas
- OBV adds volume on an up-close and subtracts it on a down-close to form a cumulative line.
- The article treats matching price and OBV highs or lows as trend confirmation.
- A price high without a corresponding OBV high is presented as a potential bearish divergence.
- Rising OBV during falling or range-bound prices is presented as a possible bullish divergence.
- OBV is described as a contextual signal that should be combined with other indicators, not used alone for precise timing.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.