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OBV : On Balance Volume Indikator Is
On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and reduces volume on down days. When a security closes higher than its previous close, all of that day’s volume is considered up volume. When a security closes lower than its previous close, all of that day’s volume is considered down volume. The on balance volume indicator tells you that the number of up days is more than the down days. As a result, it could be a sign that the bullish trend will continue for a while. On the other hand, a falling On Balance Volume means that the volume of down days is falling. Therefore, it could be a sign that there are more sellers in the market than buyers. In most cases, traders focus on the trend of the indicator rather than the absolute numbers. Therefore, it is advisable to first look at the trend of the asset and then identify whether it matches the On Balance Volume indicator. Then, see if the trend matches the OBV line.
How Does the Balance Volume Indicator Work?
The actual value of the OBV is not important; concentrate on its direction.
- When price and OBV make higher highs and higher lows, the uptrend is likely to continue.
- When price and OBV make lower highs and lower lows, the downtrend is likely to continue.
- During a trading range, if the OBV is rising, accumulation may be occurring—a warning of an upward breakout.
- During a trading range, if the OBV is falling, distribution may be occurring—a warning of a downside breakout.
- When price continues to make higher highs and OBV fails to make higher highs, the uptrend is likely to stall or fail. This is called negative divergence.
- When price continues to make lower lows and OBV fails to make lower lows, the downtrend is likely stalled or failing. This is called positive divergence.
On Balance Volume Indicator Calculation and Formula
The calculation uses the equilibrium volume formula as follows:- Current OBV = the previous OBV + the current volume (This applies when the closing price is above the previous closing price).
- Current OBV = Previous OBV – Current Volume
- Current OBV = Previous OBV (if the closing price is the same as the previous closing price)
Trading Rules
During an uptrend, On Balance Volume will follow the direction of price and will continue to make higher highs and higher lows. Therefore, both charts, i.e. the price chart and the On Balance Volume chart, will look almost identical. As long as both charts are moving in the same manner, the trend is said to be perfectly up, i.e. volume is supporting the price move up. On the other hand, during a downtrend, the OBV should be making lower highs and lower lows in the same style as price and this confirms that volume is supporting the downtrend and it is truly intact. There comes a time when price and On Balance Volume fail to respond to each other. This can occur in one of the following ways:1. No Confirmation of Uptrend
Here price will make a new higher top but Balance Volume will fail to make a new higher top. This is the first sign of trouble in an uptrend. This shows that even though price is rising and making higher tops but volume is failing to sustain it. This shows that the rise in price is not supported by the rise in volume. This is called non-confirmation and such type of non-confirmation occurs and can occur at the end of an uptrend.2. Non-Confirmation of Downtrend
During a downtrend, price and volume are both expected to fall in the same manner i.e. lower tops and lower bottoms. Sometimes we will find that volume and price do not move together i.e. price has broken the last bottom but volume has not broken through. This indicates that price has broken out with lower volume. This is the trouble spot for a downtrend as volume no longer supports the price decline. This is called non-confirmation. This type of confirmation occurs at the end of a bear market.3. Advanced Penetration
Another important and interesting factor of On Balance Volume is the continuation breakout. As price and volume continue to rise together, it seems that there is no problem but the time will come when we will see that price is unable to break the previous peak, but the OBV line has broken the previous peak. This is called a continuation breakout. It shows that although price has risen a little, the volume generated is so high that OBV has made a continuation breakout. This is a signal that tells us that price will also break the previous peak. In fact, non-confirmation is a matter of weakness while continuation breakout is a matter of strength.4. Advanced Damage
In a downtrend, Price and Volume On Balance are both expected to move in the same manner where both will make lower tops and lower bottoms. But sometimes price will fail to break the previous bottom while Volume On Balance will break the previous bottom. This is called continuation breakdown. A continuation breakdown indicates that price will break the bottom as well. This is a matter of weakness on the part of price.Balance Volume Strategy
Like all other indicators, you don’t need to know how to calculate the OBV indicator. All you need to do is apply it to your chart and then interpret it. Also, you need to know that On Balance Volume works well in trending markets. Indeed, it should not be used when the market is consolidating. You need to know that OBV works well when used in combination with other indicators. These indicators can be moving averages and relative strength index.Follow and Confirm Trends
One way to use the on balance volume is to follow and confirm the trend, the price of the EUR/USD pair is rising when the On Balance Volume indicator is in an uptrend. The price starts to fall when the OBV is falling. Therefore, it is easy to use the indicator when the price is rising. Another way to use this indicator is to find when a currency pair or stock wants to diverge and move lower.Combine With Other Indicators
Another strategy using on-balance volume is to combine it with other indicators. The most popular way, as stated above, is to combine it with moving averages and find crossovers. For example, buy and sell signals appear when on-balance volume makes a crossover with a moving average.Find Divergence
Another strategy for using Volume On Balance is to use divergence. Divergence occurs when the OBV indicator rises while the asset price falls. When this happens, it usually means that there is an imbalance between the asset price and the overall volume. In other words, a bullish divergence forms when the OBV rises while the stock falls. However, in most cases, this divergence is usually difficult to see.Learn Various Indicators Easily
You will easily recognize the indicators in trading. Keep reading GIC journals only on our website. In addition, you can also watch educational videos via GIC youtube, there you will find many educational videos for beginners and professionals. In addition, you can start trading via GICTrade and register now to experience low capital trading with the possibility of profit!
