The On-Balance Volume (OBV) indicator is one of the most powerful and simple tools a PSX (Pakistan Stock Exchange) investor can use. It helps you see what the large, professional investors are doing by tracking the sheer force of buying and selling before the price fully catches up.
Think of it this way: Price is the headline you read in the newspaper, but Volume (how many shares are traded) is the engine driving that story. OBV keeps a running score of that engine's power.
What OBV Actually Does (The Simple Scorecard)
The OBV line is simply a continuous tally of buying and selling pressure:
If the stock price closes HIGHER today than yesterday (a "Green Day"), OBV ADDS all of today's traded volume to its running total. (This is Buying Pressure or Accumulation).
If the stock price closes LOWER today than yesterday (a "Red Day"), OBV SUBTRACTS all of today's traded volume from its running total. (This is Selling Pressure or Distribution).
The actual number on the OBV line doesn't matter. What matters is the direction the line is moving:
Rising OBV Line: Means buying volume is stronger than selling volume over time. The "engine" is gaining power.
Falling OBV Line: Means selling volume is stronger than buying volume over time. The "engine" is losing power.
How to Trade PSX Stocks Using OBV
PSX traders mostly use the OBV for two key signals:
1. Trend Confirmation (The "Engine Check")
You want the volume (OBV) to confirm what the price is doing.
Price is... | OBV is... | Conclusion | Trade Signal (for PSX) |
Rising (Making higher highs) | Rising (Making higher highs) | Strong Trend: Volume is backing the rise. It’s a healthy rally. | CONFIRM your current Buy/Hold position. |
Falling (Making lower lows) | Falling (Making lower lows) | Strong Trend: Volume is backing the fall. The decline is serious. | CONFIRM your Sell/Avoid decision. |
2. Divergence (The Early Warning Bell)
This is the most powerful signal. It happens when the price and the OBV line disagree. It suggests that the price movement is a lie and a reversal is coming.
Type of Divergence | Price Action | OBV Action | Warning Signal |
Bullish Divergence | Price hits a new Low | OBV fails to hit a new Low (or starts rising) | Institutions are quietly buying! Selling pressure is drying up, and a price surge is expected. |
Bearish Divergence | Price hits a new High | OBV fails to hit a new High (or starts falling) | Institutions are quietly selling! The rally is weak, and a price drop is expected. |
Example for PSX: If a stock on the KSE-100 index hits a new high, but you look at the OBV line and see it's flat or pointing down, it’s a huge red flag! It means the big players are not interested in buying at the higher price, suggesting the rally is built on "retail hype" and is likely to collapse.