Why On-Balance Volume (OBV) Was Created

The On-Balance Volume (OBV) indicator was created by Joe Granville in the 1960s to address a critical gap in technical analysis: understanding the role of volume in price movements. Granville recognized that while price action was widely tracked, the underlying strength of that movement—often reflected in volume—was frequently overlooked.

Before OBV, traders evaluated volume in isolation, typically comparing it across time periods without tying it directly to price changes. Granville's insight was that volume should be interpreted relative to price direction to reveal accumulation or distribution phases. By cumulatively tracking volume based on whether the price closed higher or lower, OBV offered a new lens to validate price trends.

Granville believed that smart money activity was often hidden within volume flows. If volume increased during upward price moves, it suggested strong buying interest. Conversely, rising volume during falling prices signaled strong selling pressure. OBV was designed to capture this dynamic in a single, running total.

The indicator was also meant to anticipate potential reversals. Divergences between OBV and price—such as price making new highs while OBV fails to confirm—could indicate weakening momentum. This early warning system allowed traders to question the sustainability of trends.

In essence, OBV was created to emphasize the importance of volume as a confirming mechanism for price trends. It introduced a method to quantify and visualize the 'effort' behind price movements, aiming to guide traders toward more informed interpretations of market behavior.