On-Balance Volume OBV Indicator Trading Strategy and Tips
An advance on increasing volume is generally viewed as a bullish signal, while a decline on heavy volume can be interpreted as a bearish signal. New highs or lows on decreasing volume may signal an impending reversal in the prevailing price trend. The chart for Medtronic (MDT) shows a bearish divergence with volume leading price lower. Also, notice that OBV broke support during this divergence period. The uptrend in OBV reversed with the break below the February low.
Prior to making any decisions, carefully assess your financial situation and determine whether you can afford the potential risk of losing your money. As readings in the OBV indicator can be distorted when major events occur, traders should always look to an economic calendar. Economic calendars will help you avoid the surprise price movements that can sometimes lead to trading losses. A reversal in the uptrend follows, and the decline in prices could have been known in advance for traders using the OBV as a reversal indicator. Bullish divergences occur when the OBV indicator is rising as market prices are falling.
As with other momentum indicators, such as the MACD, higher levels of the OBV indicator’s stronger momentum reinforces the current price trend. When the OBV diverges from the direction of a security’s price movement, it may be an early indicator of a pending trend change. This is a modified OBV indicator that creates an oscillator by smoothing the difference between the value of the OBV and a short moving average of the OBV. SMAs of the oscillator are also provided to study crosses and convergence/divergence.
The On-Balance Volume (OBV) indicator was developed by Granville, who believed that volume could signal an upcoming trend change or significant market movement. It is often called the “smart money indicator” because it reveals the actions of large players in the financial markets before the general public becomes aware of them. Granville’s use of volume as a leading indicator has helped traders to anticipate market movements and make informed decisions. Conversely, when the OBV line is falling, it suggests that selling pressure is increasing, and the price will likely continue to fall.
Market Breadth Indicators
In the case of on-balance volume, it is calculated by summing the volume on an up-day and subtracting the volume on a down-day. To answer this question, we should start by focusing on two key characteristics of today’s markets https://bigbostrade.com/ – volume and volatility. Both have come a long way since the time the OBV indicator was proposed for the first time in the 60s. Order flow traders find both indicators useful and may apply each depending on the situation.
- This means traders can use the signals they generate to confirm or reject one another.
- So the increase in volume doesn’t necessarily cause higher prices.
- A period’s volume is positive when the close is above the prior close and is negative when the close is below the prior close.
- Prior to making any decisions, carefully assess your financial situation and determine whether you can afford the potential risk of losing your money.
If the OBV is moving notably in one direction, it could give credence to the idea that a big move could be coming in that direction in price. Its value is also dependent on the starting point of the calculation. Since volume is additive when the asset increases in price, the OBV will tend to follow the general trend of the market. It will tend to increase in uptrends and decrease in downtrends. When the OBV line is rising, it suggests that buying pressure is increasing, and the price will likely continue to rise.
Understanding On-Balance Volume
In that sense, a too steep OBV line signals the market sentiment is getting too positive or too negative. When the indicator was first introduced, it was considered something revolutionary. Even today, it remains widely popular among technical traders. However, as soon as market volume became a target for manipulations, the principles most volume indicators are based on started losing their usefulness.
When you’re using On Balance Volume indicator in highly liquid markets like Forex main Currencies (e.g. EUR/USD) it can’t help you much to identify whether the signal is right or wrong. 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.
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The Difference Between On-Balance Volume and Other Indicators
On-Balance Volume (OBV) is an indicator that measures momentum. It was created in 1932 by Joseph Granville, making its first appearance in his book Granville’s New Key to Stock Market Profits. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Fundamental events (such as a corporate earnings report or a significant macroeconomic data release) can have a dramatic impact on sentiment when unexpected changes occur.
- On Balance Volume (OBV) is available in SharpCharts as an indicator.
- In the chart example below, we can see markets can find a healthy support level after a period of decline.
- While the OBV factors all volume, the cumulative delta volume indicator reflects only the volume that occurs on the bid and ask sides.
- A buy order would be placed at the second touch of the trendline.
- Patterns coupled with the OBV can give extra confirmation to trends as well as changes in trends.
You can see the numerical value for the indicator as well, although it isn’t considered as important. It is advisable to focus on the line’s slope and its overall direction instead. That’s because they better indicate the buying and the selling pressure. This low volume confirmation signaled to the trader that new money was not supporting this higher move in price. I also have added labels and alerts which pop up when the OBV is giving signals a trader should pay attention to. Next, I have added a red dot for bearish divergence and a green dot for bullish divergence.
As a volume-tracking indicator, the OBV comes ready to go and doesn’t require any particular adjustments. The settings are pre-defined since the on-balance volume automatically adjusts its values based on the automated calculations it makes. Learning to apply the OBV indicator for the identification of such practices will help you stay away from such unstable and artificially-influenced trends. When the OBV crosses above the EMA, we go long after confirmation with a secondary indicator.
Market Trend Technical Indicators
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On Balance Volume Technical Indicator (OBV) is a momentum technical indicator that relates volume to price change. The indicator, which Joseph Granville came up with, is pretty simple. When the security closes higher than the previous close, all of the days volume is considered up-volume. When the security closes lower than the previous close, all of the days volume is considered down-volume.
In another scenario, traders can look for divergence on the indicator. Divergence occurs when the price of an asset moves in the opposite direction of the OBV. For instance, if the price is making higher highs and the OBV is making lower highs, it could indicate a weakening buying pressure and a potential trend reversal.
For example, if today’s closing price is higher than yesterdays then the most up to date OBV would be the previous OBV + today’s volume. If today’s closing is lower than yesterdays, the OBV would be the previous on balance volume – today’s volume. Bitcoin and other cryptocurrencies price movements are very different from other asset classes. Sometimes bitcoin price is ranging too long which cause traders to lose their concentration.
Today, traders also use the on-balance volume indicator as a tool to help them find out when institutional and retail investors are present on the market. It also lets them distinguish the volume generated by either group. Once the price follows the volume and goes up, institutional investors start selling, while retail investors start buying. The world of momentum indicators has so much to offer that traders often feel confused about the best tools to enhance their performance. The on-balance volume indicator usually is among the first that comes to mind, and rightly so. As an indicator based on volume flow information, it is a useful tool to help traders forecast the expected security price changes and capture their momentum.
On the green candle highlighted below, the candle closed much higher than the previous candle close while the OBV signaled a very small volume gain. The basic assumption, forex expert advisor regarding On Balance Volume analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV.
Volume is a handy tool to study trends, and as you can see, there are many ways to use it. Basic guidelines can be used to assess market strength or weakness, as well as to check if volume is confirming a price move or signaling that a reversal might be at hand. Indicators based on volume are sometimes used to help in the decision process. In short, while volume is not a precise tool, entry and exit signals can sometimes be identified by looking at price action, volume, and a volume indicator.
Let’s take a hypothetical daily set of share price and share volume numbers. When the indicator was developed in the 1960s, the idea was that when volume decreases without an accompanying move in the security, a down move would soon expectedly follow. Similarly, if volume increases without an attendant rise in the security, an upward move is expected to follow. OBV Can Be Sensitive To Price FluctuationsThe OBV is sensitive to price fluctuations, which can lead to a high number of signals that may be difficult to interpret.