Raw volume data is noisy—did today's 10M shares indicate buying or selling? We need a cumulative metric that assigns volume to the winning side each day.
OBV0 = 0 (arbitrary starting point; only the direction matters)
Why this works: Volume is the fuel. OBV tracks which team (bulls or bears) is burning more fuel. The absolute OBV number is meaningless—what matters is the trend and divergences.
Why it matters: Institutions aim to execute near VWAP to minimize market impact. If price keeps bouncing off VWAP, it's acting as dynamic support/resistance.
Intuition: If close is near the high, buyers controlled the day—multiply that day's volume by a positive number. If close is near the low, sellers controlled—multiply by negative.
Recall Feynman Explanation (Explain to a 12-Year-Old)
Imagine you and your friends are voting on whether to play cricket or study. Every day, you tally the votes.
If cricket wins, you add all the votes to "cricket score."
If study wins, you subtract all the votes from the "cricket score."
After a week, the cricket score is +30. That means cricket is winning overall—even if study won a couple of days, cricket had more total votes.
OBV does this with stocks: if the price goes up, we add the day's number of shares traded (buyers won). If price goes down, we subtract those shares (sellers won). The running total shows who's been winning the battle—buyers or sellers—over time. (We count shares, not rupees.)
The sneaky part: sometimes the price keeps going up, but the cricket score stops growing. That means fewer people are voting for cricket even though it's still "winning." That's a sign cricket might lose soon!
Money-Flow-Index – Unlike OBV, MFI is rupee/price-weighted volume flow
MACD – Both look for divergences; combine them for stronger signals
#flashcards/stock-market
What does OBV stand for and what does it measure?
On-Balance Volume. It's a cumulative indicator that adds share volume on up-days and subtracts share volume on down-days to reveal the direction of volume flow (share-based, not rupee-based).
How do you calculate OBV for day t?
OBVt=OBVt−1+sign(Ct−Ct−1)⋅Vt. Add volume if close is higher than previous close, subtract if lower, ignore if unchanged.
What is a bearish OBV divergence?
Price makes higher highs, but OBV makes lower highs. It signals that volume on down-days is increasing—distribution by smart money. Often precedes a reversal.
What is a bullish OBV divergence?
Price makes lower lows, but OBV makes higher lows. Indicates accumulation—selling pressure is exhausted, buying volume is secretly increasing.
Why is the absolute OBV number meaningless?
OBV starts at an arbitrary value (usually 0). Only the trend direction and divergences relative to recent OBV history matter, not the magnitude.
Is OBV a measure of rupee/dollar money flow?
No. OBV sums share volume only—it ignores the price of each share. For price-weighted (money) flow, use VWAP or the Money Flow Index (MFI).
What does high volume on a flat price day indicate?
Indecision or a battle at a key support/resistance level. Often precedes a breakout or breakdown—neither side has won yet, but tension is building.
What is VWAP and why do institutions care?
Volume-Weighted Average Price. It's the average price weighted by volume. Institutions use it as a benchmark to measure execution quality—trading near VWAP minimizes market impact.
Should you short immediately when you see bearish OBV divergence?
No. Divergence can persist for days/weeks. Wait for price confirmation like a breakdown below support or a bearish reversal candle before entering a short.
OBV yani On-Balance Volume ek simple lekin powerful indicator hai jo volume ko track karta hai. Socho ki stock market mein har din ek battle hoti hai buyers aur sellers ke bech. Agar price up close karta hai, matlab buyers jeet gaye—toh us din ka pora volume (yaani kitne shares trade huye) "buyers ki taraf" count hota hai. Agar price neeche close hua, toh sellers jete—volume ko minus kar do. Aise har din ka cumulative score OBV kehlata hai. Yaad rakho: OBV shares count karta hai, rupaye nahi.
Sabse important pattern hai divergence. Agar stock ki price badhti ja rahi hai lekin OBV gir raha hai, toh yeh red flag hai. Iska matlab hai ki har up-move ke saath volume kam ho raha hai—smart money (institutions) sell kar rahe hain aur retail investors late entry le rahe hain. Yeh signal hai ki rally weak hai aur jaldi reversal aa sakta hai. Ulta bhi hota hai: agar price gir rahi hai lekin OBV badh raha hai, toh accumulation ho raha hai—insiders cheap mein khareed rahe hain, aur yeh bullish signal hai.
Ek important galat-fehmi door karo: OBV "kitna paisa" flow ho raha hai yeh nahi batata—yeh sirf share volume ka flow batata hai, price ko ignore karta hai. Agar tumhe rupaye-weighted flow chahiye toh VWAP ya Money Flow Index (MFI) use karo. OBV ka absolute number (jaise "OBV 50 million shares hai") koi matlab nahi rakhta—sirf trend aur uska price ke saath comparison matter karta hai. Agar tum sirf price dekh kar trade karte ho, toh tum picture ka sirf adha hissa dekh rahe ho—volume se conviction pata chalta hai.
OBV use karte waqt sabse bada mistake yeh hai ki divergence dekhte hi turant trade le lo. Divergence ek warning hai, buy/sell signal nahi. Patience rakho, price confirmation ka wait karo (jaise support tootna ya bearish candle), tab entry lo. Agar early short loge toh price aur upar ja sakti hai aur stop-loss lag jayega.
