What it is
On-Balance Volume, introduced by Joseph Granville in 1963, is a running total that adds the full session volume when the close is higher than the previous close and subtracts it when the close is lower. Its purpose is to show whether volume has been accumulating on up days or on down days.
How it works
Only the sign of the close-to-close change matters; a one-cent gain and a five-percent gain contribute identically. The resulting line has no meaningful absolute value because it depends entirely on where the series was started, so it is read purely as a shape: rising, falling, flat, or diverging from price.
How traders use it
The classic uses are confirmation and divergence. An advance in which OBV also makes higher highs suggests real buying volume is behind it, while an advance where OBV flattens or rolls over suggests the move is being carried on thin participation. Around breakouts, a jump in OBV as price clears a level is treated as evidence that the break has volume behind it rather than drifting through an empty book.
Where it breaks down
The binary treatment of volume is crude — a session that opens sharply lower and closes marginally up counts entirely as accumulation — and a single outlier day such as an index rebalance or an expiry can shift the line permanently. It also assumes the volume series is complete and comparable, which is unreliable where a large share of trading is off-exchange, and arbitrary in twenty-four-hour markets where the daily close is a bookkeeping convention. Use it for shape and divergence, never for its level.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.