The On-Balance Volume (OBV) is used to confirm trends by measuring the cumulative buying and selling pressure of a security over a specific time period. It provides a visual representation of the volume flow, indicating whether buying or selling pressure is dominating the market and potentially confirming the strength of a trend.
When the OBV is trending upwards along with the price, it suggests that buying pressure is increasing, confirming an uptrend. This indicates that the volume on up days is higher than the volume on down days, and there is a positive market sentiment.
Conversely, when the OBV is trending downwards along with the price, it implies that selling pressure is increasing, confirming a downtrend. This indicates that the volume on down days is higher than the volume on up days, and there is a negative market sentiment.
By confirming the trend, the OBV helps traders and investors gauge the validity and strength of a price movement. It can also provide early signals of a potential trend reversal when price diverges from the OBV.