On Balance Volume Indicator OBV

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. Volume Accumulation Percentage Indicator is a variation of the classic volume-accumulation indicators.

• Granville believed that volume was the key force behind markets and designed OBV to project when major moves in the markets would occur based on volume changes.
• So, when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too.
• When the current closing price is higher than the previous closing price, the current volume is added to the previous trading volume.
• PrimeXBT products are complex instruments and come with a high risk of losing money rapidly due to leverage.
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Chartists can look for divergences between the on balance volume study and price to predict price movements or use the on balance volume to confirm price trends. The On-Balance Volume indicator is a cumulative total of volume, positive and negative, displaying the inflow or outflow of money and capital into a stock, forex, or crypto asset. Because volume picks up before the price on stock charts begins to move, it’s considered a leading indicator. So, we have studied how the OBV index forex works, how to read OBV signals, and how to interpret the on balance volume chart.

How does OBV indicator work?

Many tools can be used to discover and plot lines of support and resistance, and the OBV indicator is no different. The indicator responds to levels of support and resistance sooner than price does, helping traders better understand where to place entry and exits. Thus, with a little practice, the signals it provides can be easy to spot and take action on. By definition, the On-Balance Volume ondicator is a momentum indicator that relies on volume flow to measure momentum.

First, I have added a Simple Moving Average to the OBV Study, to identify when the on balance volume is above or below average. Using trend lines, these differences are easier to spot. With the OBV, volume is added or subtracted at the close of the candle so the trend lines should always be drawn against the close of the candle body, not against the wicks or the open of the candle. When price continues to make higher peaks and OBV fails to make higher peaks, the upward trend is likely to stall or fail. OBV provides fair feedback on major highs and lows and is very useful in measuring the breakout and breakdown potentials. In addition, it predicts bearish divergence depending on the rally.

The purple lines in the chart connect the highs of the candlesticks and the OBV peaks. There is a divergence, so, we can anticipate a trend reversal. Such a type of divergence is quite common in the minutes’ charts, where the trade volume in a short period is important.

What Is On-Balance Volume (OBV)?

The On Balance Volume doesn’t consider the strength of the price move. For example, the signals are not distorted by the new releases. To measure buying volume and enter a buy trade, the EMA 12 should break through the EMA 34 upside. To enter a sell trade, the fast EMA breaks the slow EMA downside. A stop loss is set a little higher than the most recent local high .

You can also use the OBV in day trading to confirm the trend continuation or the authenticity of the support and resistance levels breakouts. The only difference is in OBV trading in very short timeframes, where the signals are not that accurate because of the price noise. The OBV indicator is called the “smart money” indicator because it can tip a trader off as to larger players taking early positions in markets, ahead of major trend changes or breakouts. These moves can be spotted on the OBV indicator, sometimes days before they occur. When price finally breaches a trendline, a trader will take it as confirmation of the OBV signal, and enter a trade based on the direction of the breakout. In the supplied example, the breakout can be seen on the OBV chart days before the asset’s price responded to they buy pressure.

A step by step guide to help beginner and profitable traders have a full overview of all the important skills (and what to learn next 😉) to reach profitable trading ASAP. A new peak in the OBV shows that buyers are strong and sellers are weak. A new bottom in the OBV means that sellers are strong and buyers are weak, thus the price is likely to drop. If the OBV increases or decreases in consonance with the price, this means that the underlying trend has been confirmed.

On Balance Volume Indicator Interpretation: Reading the Charts

It is specified that the past performance of a financial product does not prejudge in any way their future performance. The foreign exchange market and derivatives such as CFDs , Non-Deliverable Bitcoin Settled Products and Short-Term Bitcoin Settled Contracts involve a high degree of risk. They require a good level of financial knowledge and experience. While some indicators such as the MACD are considered lagging indicators, the On-Balance Volume indicator is considered a leading indicator. Although it can supply traders with early signals to take action on, it occasionally will give false readings that can lead to losses. In the below weekly price chart, a large, multi-month bullish divergence can be seen playing out, with the OBV providing an early signal that a reversal is in the making.

In other words, if the closing price of the bitcoin doesn’t change in one day, The OBV going to show last day volume amount. You can measure the volume of any candle with a simple volume indicator on your charts. But, the OBV indicator helps you to see the volume trend better and moreover, To know when “smart money” comes to play. When assets are trading with a tight range, OBV rising could signal accumulation while OBV falling could signal distribution taking place before a move lower. The sideways trend is indicative here, I marked it with the red oval. You know that MAs often send false signals in trading flat, and this results in a loss.

On-Balance Volume Indicator Strategy Explained

A bearish divergence forms when OBV moves lower or forms a lower low even as prices move higher or forge a higher high. The divergence between OBV and price should alert chartists that a price reversal could be in the making. OBV rises when volume on up days outpaces volume on down days. A rising OBV reflects positive volume pressure that can lead to higher prices. Conversely, falling OBV reflects negative volume pressure that can foreshadow lower prices.

Compared to other momentum indicators, the OBV is efficient in trading almost all Forex instruments. When combined with trendlines, OBV can often predict movements before they occur. The tool can also be used alongside other trading technical analysis indicators such as the 200-day moving average for confirmation of ultra-safe position entries. Combined with the right strategies, a trader can extract even more profit from the market while reducing risk to an absolute minimum. The green lines in the chart mark the support levels to the price and the open blue represents the indicator. The red arrow marks the breakout point where the selling pressure is considered low.

Finally, If the price was moving in a specific range you can confirm the breakout earlier with help of the OBV indicator. When the price trend and the OBV trend had opposite directions, then you can expect a price reversal. On Balance Volume is a cumulative indicator for measuring volume flow. When both price and OBV are making higher highs and higher lows, the asset is in an uptrend that is likely to continue for the foreseeable future.

Confirming Bearish Retests of Resistance With Multiple Bearish Divergences

He popularized the OBV technique in his book New Key to Stock Market Profits. Granville compared the trade volume to the steam that is driving the market engine. The index can be applied to stocks individually based upon their daily up or down close, or to the market as a whole, why are stock trainer app for traders and how to choose them correctly using breadth of market data, i.e. the advance/decline ratio. If you have an interest in financial trading, you must have knowledge of two concepts, moving averages and volume…. To confirm the direction of a trend, see if the OBV line moves in the same direction as the price.

On Balance Volume Study and How to Use the OBV Indicator?

Traders should always include trend lines or moving averages in combination with the OBV indicator when performing technical analysis for the greatest possible profit potential and risk management. By waiting for these other signals to confirm the OBV indicator signals, it can produce a winning combination. Experts recommend interpreting the OBV changes together with the price chart moves. If the OBV value is rising along with the price, the trend should continue. If the OBV value goes down while the price goes up , the trend should reverse. The on balance volume can also confirm the breakouts of the support or resistance levels due to down or up days.

To check the strength of the breakout of the support and resistance levels, you need to draw a similar line on the On Balance Volume chart. If the OBV line also breaks through the levels, the breakout is true. You should also remember that the OBV signals usually happen a few bars before the price movement.

Now, we shall see how to trade the OBV in Forex and boost our stock market profits. Traders use this indicator both to predict trend reversals and to confirm the trend continuation. On-balance volume, creates a running total of positive and negative trading volume for a stock or security. One of the original momentum oscillators, OBV spawns from Joe Granville’s theory that volume precedes price in an instructive, measurable fashion. The formula’s calculation is simple, rising whenever volume on up days is greater than volume on down days and vice versa. Traders can use OBV to confirm the underlying trend or look for divergences that may cover a price change.

This way, you can increase the performance of your OBV strategy and have more winning trades. One of the trend indicators, the Bollinger Bands https://traderoom.info/ indicator, is covered in thisarticle. TheBTCUSD chart above displays one of the most common lagging indicators, the bearish divergence.

Therefore, it’s better to not use OBV indicator in lower time frames or confirm its signal with other indicators before opening a position. In this example, bitcoin price reached a critical resistance level, and as it went higher, OBV indicated lower volume. In fac, OBV clearly showed the price reversal of bitcoin before the price fell. In other words when the price went higher bulls lost their power and bears took control of the price. When changes in price and volume have a positive correlation, we can simply confirm a trend.

The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend there is more volume on up days than down days. Total volume for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value. So, when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too.

Investing involves risk, including the possible loss of principal. Another mistake to avoid in using the OBV is that a large spike in volume on a single day can ig forex broker review throw off the indicator for quite a while. The OBV technical indicator uses volume to indicate momentum. Look at the changes made to the on balance volume study.

In these situations, you can’t figure out whether buyers/sellers can maintain their control over price after reaching new levels or they just lost control. In other words, you can use OBV indicator before breakouts to see increasing in volume but after it happened, you should be very careful and use other indicators to confirm price action. The volatility of markets can affect OBV indicator performance quite much. After price breakouts, OBV can give you wrong signals about buyers/sellers power.

As the exponential moving average is an additional signal filter, I recommend setting the take profit at a distance equal to the stop loss. You can also exit the trade manually when the fast EMA breaks through the slow EMA in the opposite direction. Or the price and the indicator line stop close to the support or resistance level. Now, I would like to give an example of a successful OBV trading strategy. It is the OBV indicator with moving average in the MT4 platform. To reduce the time lag, I recommend using the EMA and the OBV indicators together.

Due to the high volatility within the day and the abundance of false signals, we set a take profit level at a fixed distance twice as long as that of the stop loss. Soon, the bitcoin price drops sharply and crosses the take profit level, and the trade is exited automatically before the trade goes further to the down days and investor lose money rapidly. Note that the chart indicates a downtrend while the on balance volume line starts rising gradually. Finally, the trend reverses, and instead of a bearish outcome, a bullish trend starts . Later on, the On-Balance Volume indicator was developed by a prominent financial analyst, Joseph E. Granville. Granville believed the trade volume to be the main driver of the financial markets.

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