I just noticed that many traders still don’t truly understand On Balance Volume, even though it’s a very helpful tool for confirming price trends.

The real truth is that price only becomes credible when trading volume supports it, but there aren’t many good volume analysis tools. On Balance Volume, or OBV, is one that I like to use because it accurately shows accumulated buying and selling pressure, and it also helps detect turning points in price.

OBV was developed by Joseph Granville in 1963, based on the basic idea that trading volume drives price—not the other way around. The calculation of On Balance Volume is fairly simple: if the closing price is higher than the previous bar, volume is added; if it falls, volume is subtracted; if it stays the same, volume does not change. Using this method, we can track the buying and selling strength of major investors.

What’s interesting is this: when the price moves upward together with OBV continuing to rise, it shows that an uptrend is strong. But if OBV starts not to follow the price upward (Divergence), that’s a warning sign that the trend may be changing. I’ve used signals like this many times, and they’ve helped me avoid entering trades at bad points.

To use On Balance Volume effectively, you need to know that it’s a momentum indicator—not a standalone tool that tells the direction of price by itself. I often combine it with Moving Averages or Bollinger Bands to increase accuracy.

For example, if the JPYUSD price is in a downtrend below the EMA25 line, along with OBV declining continuously, it confirms that the downtrend is still strong. But when OBV stops making new lower lows while the price is still falling, that’s where the price may start to reverse. When the price begins trying to break out above the EMA25 line, that’s the best time to enter a trade.

Or take the case of Microsoft stock that I saw earlier: the price moved up to make a new high (Higher High) along with OBV progressing, indicating that the uptrend was strong. But when OBV starts not to make new highs while the price is still trying to rise, that’s a Divergence signal saying the trend has changed. If the price hits the upper Bollinger Bands and then breaks downward with a large red candle, that’s a good entry point for a sell trade.

Using On Balance Volume correctly means you must know not to use it alone. Combining it with other trend analysis tools will make your trading decisions much more accurate. The importance of trading volume in confirming price should not be overlooked, because a price without supporting volume is not reliable.

In summary, if you still don’t know On Balance Volume, try studying it. It will help you become a smarter trader, and knowing these good tools is the difference between random trading and planned trading.