On-Balance Volume keeps a running tally. If today's close is higher than yesterday's, add today's volume to the total. If it's lower, subtract it. If unchanged, do nothing. The absolute number doesn't matter. What matters is the direction of the OBV line and whether it confirms or diverges from the price trend.

The idea is simple: volume precedes price. If smart money is quietly accumulating a stock, OBV will rise even before the price breaks out, because buying volume is outpacing selling volume. If institutions are distributing (selling into strength), OBV will flatten or decline even as the price continues to rise, a warning that the rally is on borrowed time.

OBV works best on higher timeframes and for assets with meaningful volume. It's particularly useful for index ETFs and large-cap stocks where institutional flow is a major driver. A stock making new price highs while OBV makes new highs is a healthy trend. A stock making new highs while OBV diverges downward is a trend that may be about to fail.