The on-balance volume indicator (OBV) is used in technical indicators to measure sellers’ and buyers’ pressure. Woods and Vignola, in their original publication, referred to the strategy as continuous volume. It was later referred to as “on-balance volume (OBV)” by Joseph Granville, who publicized the technique in his 1963 book ‘Granville’s New Key to Stock Market Profits.’
What is an On Balance Volume (OBV), and how does it work?
The On Balance Volume Indicator is widely considered among the most popular movement and leading indicators in the business, and it is particularly effective at identifying new trading opportunities.
The OBV is mainly traded on the stock market, although it is also traded on indices, commodities, and foreign exchange. It is a pure momentum oscillator, similar to the RSI, although pattern analysis can be used with OBV to strengthen the robustness of the signal.
So, if you are here to learn about volume indicators, we are here with all the details to help you!
The Development of the OBV Indicator
Buy and sell pressure are measured by On-Balance-Volume (OBV). This periodic indicator adds volume on up-days and deducts volume on down-days to determine purchase and selling pressure. When the security closes at a higher price than it did the previous day, the entire day’s volume is categorized as up-volume. It is called down-volume when the security closes at a lower price than it closed the previous day.
Construction of the OBV Indicator
For example, a down day with 100,000 in volume is not as meaningful as an up day with 50,00000 in volume on the subsequent up day. The volume shows that buyers are pretty active in driving the price up, and as a result, the OBV will move up during the two days, even though one day was down and the other up in the market.
The Operation of the OBV Indicator
Trading ideas are generated mainly by looking at the rate of change in OBV rather than its absolute value, which traders find more useful. If the OBV is moving significantly in one way, this could validate the notion that a significant price move in that direction is on the horizon.
- Â Â Â Â The upward movement is more likely to proceed when the price and the OBV have more extraordinary peaks and lower troughs.
-     When both the price and the OBV have lower peaks and lower troughs, it is more likely that the downward trend will continue. – If the OBV increases during a trading range, it is possible that accumulation is taking place — a sign that an upward breakout is imminent.
- Â Â Â Â If the OBV is declining during a trading range, the dispersion may occur, a warning sign of a negative breakout.
- Â Â Â Â A price that maintains higher peaks but the OBV does not maintain higher peaks indicates that the upward trend will likely halt or collapse entirely. Negative Divergence is what is referred to as this.
- Â Â Â Â As long as the price falls and the OBV does not fall, the downward trend is likely to come to a halt or collapse entirely. A positive divergence is what is referred to as this.
The actual OBV value is insignificant because the number can be huge, very close to zero, harmful, or positive. Consequently, the right axis of the OBV indicator can be ignored; however, it is crucial to note the direction and trajectory.
The following is an example of a trading technique:
Divergence Trading
Divergence arises when the price movement does not correspond to the movement of the underlying indicator. This type of Divergence can sometimes be indicative of a probable reversal in the trend. Volume swings anticipate price changes, which is especially true when one considers the OBV indicator’s idea, which is both positive and negative.
Purchasing with OBV
- Â Â Â Â The OBV is trading above the EMA (20).
- Â Â Â Â Bullish break off of the OBV trend line.
- Â Â Â Â The appearance of a bullish candlestick is confirmation.
- Â Â Â Â Positive Divergence will improve reversal, but it is not required to be effective.
Selling with OBV
- Â Â Â Â The OBV is trading below the EMA (20)
- Â Â Â Â Breakdown of the OBV trend line in a negative direction.
- Â Â Â Â A bearish candlestick confirms the prediction.
In addition to improving reversal, negative Divergence can be used, but it is not required. Traders should utilize the OBV in conjunction with other technical indicators to increase their chances of achieving profitable trades.
Conclusion
The OBV reflects the crowd’s sentiment and can be used to predict a bullish or bearish conclusion. The on-balance volume (OBV) is a prominent technical indicator of momentum, and it is used to make price forecasts by analyzing volume movements. When there is a divergence between the OBV and the price, it suggests that the price is about to reverse. To identify divergences and trading opportunities, you can utilize trend lines.