What it is

This lecture covers two of the most respected volume tools, which look at participation from opposite angles.

On-Balance Volume (OBV) is a cumulative running total that adds the period's entire volume when price closes up and subtracts it when price closes down. It compresses the buy/sell pressure of every bar into a single rising or falling line. The absolute value of OBV is meaningless - only its slope and its relationship to price matter.

Volume profile flips the usual view. Instead of plotting volume against time along the bottom of the chart, it plots volume against price along the side - a horizontal histogram showing how many shares traded at each price level over a chosen range. It answers a different question: not "when was it busy?" but "where did the business happen?"

How it works

OBV follows a deliberately simple rule, applied each period:

1. If today's close is higher than yesterday's, add today's volume to the running total.
2. If today's close is lower, subtract today's volume.
3. If unchanged, carry the total forward.

The logic is that volume on up-closes reflects accumulation and volume on down-closes reflects distribution, so the cumulative line traces net pressure. A rising OBV says buyers are committing volume; a falling OBV says sellers are.

Volume profile is built by dividing the price range into thin horizontal slices (price bins) and summing all volume traded within each bin across the period. Key features emerge:

• High-Volume Nodes (HVNs) - price levels with heavy traded volume, where the market spent time and agreed on value.
• Low-Volume Nodes (LVNs) - thin levels the market passed through quickly, finding little agreement.
• Point of Control (POC) - the single price with the most volume; the profile's centre of gravity.
• Value Area - the price band (commonly around 70% of volume) where most trade occurred.

How to use it

The two tools combine beautifully: OBV tells you about pressure over time, while volume profile tells you where price is likely to react.

• OBV confirmation and divergence: if price makes new highs and OBV makes new highs, the trend has participation. If price makes new highs but OBV flattens or rolls over, buying pressure is not keeping up - a divergence worth respecting.
• HVNs as magnets and barriers: because so much trading happened at a High-Volume Node, price often gravitates back to it and then stalls there - it acts as support or resistance. Heavy agreement means many participants have positions to defend.
• LVNs as fast zones: price tends to move quickly through Low-Volume Nodes because few orders rest there. A breakout through an LVN can run far before reaching the next HVN.
• POC as a reference: the Point of Control is a natural pivot; trading above it leans constructive, below it leans defensive.

A worked example

Imagine a stock that ranged for months between two prices, building a fat High-Volume Node in the middle of that range.

1. You note the POC sits at, say, 50, with a thin Low-Volume Node just above the range high at 60.
2. Price breaks out above 60 on a volume spike, and OBV simultaneously pushes to a new high - pressure confirms the breakout.
3. Because the zone above 60 is a Low-Volume Node, price travels quickly with little overhead supply until it nears the next High-Volume Node, where you expect it to slow.
4. Weeks later, price pulls back. The old breakout level near 60 - now a High-Volume Node edge - is a logical place to watch for support, while OBV holding its uptrend would reassure you the larger move is intact.
5. Had OBV instead diverged (price at new highs, OBV fading) during the breakout, you would have demanded more confirmation before trusting it.

Key takeaway: OBV is a cumulative pressure line read by slope and divergence; volume profile maps where trading concentrated. High-Volume Nodes act as magnets and barriers, Low-Volume Nodes as fast zones - together they tell you both the conviction behind a move and the price levels where it is likely to react.

Strengths & limits

OBV is elegant and reacts to the full volume of every bar, often turning before price and making divergences easy to spot. Volume profile is uniquely powerful because it locates support and resistance from actual transacted volume rather than from eyeballed swing points - a more objective map of where participants are committed.

The caveats deserve care. OBV's all-or-nothing rule is crude: a bar that closes up by a hair adds the same volume as a huge up-day, so a few marginal closes can distort the line; it also can not distinguish a quiet drift from a violent move of equal volume. Volume profile is sensitive to the range and the bin size you choose - a profile over the last month and one over the last year can disagree completely, and changing the bin width reshapes the nodes. Both tools are descriptive, not predictive: an HVN explains where reactions are likely, but levels break, and OBV divergences can persist for a long time. As always, treat them as evidence that strengthens or weakens a price-based thesis, never as standalone signals, and respect the event calendar that can warp any volume reading.