Here is how On Balance Volume indicator helps traders track smart money

In OBV indicator, a positive close candle volume is added cumulatively and negative close volume is subtracted to determine the trend

Volume plays a significant role in determining the movement of an asset price. Stocks or indices having marginal support of volume may fail to deliver consistent growth. If an asset is showing strong upside, but is unaccompanied by a rise in volumes (market participation), then the rally is likely to subside in the near-term.

The major indicator used to ascertain the market direction based on volume is 'On Balance Volume' (OBV). This indicator helps identify the major moves supported by volumes. Herein, a positive close candle volume is added cumulatively and negative close volume is subtracted to determine the trend.

Difference between OBV and Accumulation/Distribution

Although both OBV and Accumulation/Distribution are volume-based indicators, the former is a cumulative indicator (addition or subtraction of volume) while the latter is based on the level of the close relative to the high-low range for the period.

Significance of OBV

-- Whenever a stock witnesses a surge in volumes, the stock price is likely to follow the sentiment

-- When OBV is rising steadily, the stock price is expected to show an upward move

-- Whenever the last downward OBV high/ volume levels are crossed, the trend is said to have entered a new rally

-- A closing basis volume can help determine the overall trend for the next two or three sessions.

-- A reversal, supported by OBV, tends to provide better returns.

In case of investments, the OBV might not play such a significant role owing to the need for a broader outlook. However, in short-term trading, especially in derivatives markets, traders tend to focus on open interest, which is merely another form of studying volumes. CLICK HERE FOR THE CHART

OBV, especially, plays a crucial role in day trading. If the stock rallies without decent volume formation, then the upward trend tends to fizzle out for the rest of the day. Although, such a volume formation may materialise in the next session, in which case, follow-up buying may emerge. Therefore, identifying the volume structure in the early hours of any session is important, as it allows market participants to take maximum benefit of the trend. Various technical analysts even form one - two days' view based on the study of volumes.

Although stock price and volume may not have a direct relationship, yet, when they combine, it may lead to an extremely one-sided trending move, the sort that attracts strong interest of market participants. Large fund or institutional investors deeply understand the significance of volume and the role it plays in the market. Whenever the price fails to follow volume sentiment due to various uncertain developments, big investors look for opportunities to alter their portfolio.