On-balance Volume (OBV) is a trading momentum indicator that uses volume flow to predict changes in price. OBV shows crowd sentiment that can predict a bullish or bearish outcome.
Comparing relative action between price bars and OBV generates more actionable signals than green or red volume histograms.
The theory behind OBV is based on the distinction between smart money – namely, institutional investors – and less sophisticated retail investors. As mutual funds and pension funds begin to buy into an asset that retail investors are selling, volume may increase even as the price remains relatively level. Eventually, volume drives the price upward. At that point, larger investors begin to sell, while smaller investors begin buying.