Technical Analysis · Intermediate · 4 min
Volume indicators: OBV and VWAP
You can explain how on-balance volume and the volume-weighted average price are calculated and what each says about participation.
Volume as a line
The lesson on volume showed how to read the bars under a chart. They tell you how much was traded in each period, but comparing many bars by eye is hard.
Two popular indicators turn volume into lines. One tracks whether volume leans toward up days or down days. The other tracks the average price at which the day's trading actually happened.
Up volume minus down volume
On-balance volume, or OBV, was popularized by Joe Granville in his 1963 book Granville's New Key to Stock Market Profits. The calculation is simple:
- If the price closes higher than the day before, add that day's volume.
- If it closes lower, subtract it.
- If it closes unchanged, leave OBV as it is.
The running total rises when volume on up days outweighs volume on down days, and falls when down days dominate. Granville believed that volume tends to precede price: rising OBV while the price is flat could mean buyers are quietly active.
In the fictional chart, the price moves sideways between about 29.40 and 30.97 for 31 days. OBV, however, climbs from 0 to about 14,700, because the up days traded clearly more volume than the down days. From day 32, the price breaks out to 33.50.
As StockCharts notes, the absolute value of OBV depends on the starting date and means nothing on its own. What matters is its direction compared with the price. OBV can also mislead: a single day with huge volume can swing it strongly, regardless of how small the price change was.
The day's average price
The VWAP, volume-weighted average price, is the average price of all trades in a period, weighted by how much was traded at each price. It is usually calculated for a single day, starting at the open. StockCharts describes it as a tool developed by institutional investors to place large orders without disrupting the market.
In the fictional chart of one trading day in five-minute candles, the price rises from 100 to 101.76 and pulls back. On candle 13, it dips to 100.47 and closes at 100.60, just below the VWAP near 100.65. The next candle closes back above it, and the price ends the day at 102.40.
Many intraday traders read a price above the VWAP as buyers being in control for the day, and watch pullbacks to it. Like every indicator, it describes the day so far, not the rest of it.
Common mistakes
- Reading OBV's level. Only its direction relative to price is meaningful.
- Ignoring single volume spikes. One huge day can distort OBV for weeks.
- Using a daily VWAP across days. It resets at each open unless deliberately anchored elsewhere.
- Treating VWAP as support. It is an average, not a wall.
The takeaway
OBV adds volume on up days and subtracts it on down days. VWAP is the average price weighted by volume, usually for one trading day.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the candle where the price dipped below the VWAP and then recovered.
Tap the chart.
Candle 13 fell to 100.47 and closed at 100.60, just below the VWAP near 100.65. The next candle closed back above it.
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2How does on-balance volume change on a day when the price closes lower?
Granville's OBV adds volume on up closes and subtracts it on down closes, so it tracks whether volume leans toward up or down days.
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3What does VWAP stand for?
It is the average price of all trades in the period, weighted by how much was traded at each price.
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4Why is VWAP usually calculated for a single day?
StockCharts notes that VWAP is calculated from intraday data for a single day. Some traders anchor it to other start points.
of 4 correct.