On Balance Volume Study: How to Use the OBV Indicator

When there opens the bar immediately after the crossing, we enter the trade . A stop-loss and a take-profit are set according to the trading strategy rules . When the signal is confirmed, we look at the difference between the opening and closing prices. The next bar closes with a down gap, which is another bear signal. There is a special technical tool designed to spot divergences quickly comparing the yesterday’s closing price with the current.

• Technical analysis focuses on market action — specifically, volume and price.
• OBV and BBY moved lower in December-January, higher from March to April, lower from May to August and higher from September to October.
• Bitcoin and other cryptocurrencies price movements are very different from other asset classes.
• The divergence correctly presaged a price turn from an uptrend to a downtrend that followed about a week after the on-balance volume trend turned downward.
• It is not a standalone indicator; it can be combined with basic pattern analysis or to confirm signals from momentum oscillators.

The on-balance volume, however, is going down indicating a negative volume flow. The price chart rises, and the OBV line goes down presenting a negative volume pressure. An alternative is the sideways movement of the OBV in a bull trend. In both cases, the signal defining and using fibonacci retracement means a soon price reversal, and a bearish trend starts, confirming the rise of the selling pressure. Divergences lagging indicators are quite common signals. Divergence occurs when the indicator and the daily volume on the chart go in opposite directions.

Divergence: On Balance Volume Study

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. It is not necessary to manually calculate the on-balance volume day to day. You can simply load the on-balance volume indicator onto a stock chart. The absolute numerical values of the OBV at any given point in time are not considered as important as the OBV’s general directional movement, which is easily indicated with a chart line.

Add a moving average line to the OBV to look for OBV line breakouts; you can confirm a breakout in the price if the OBV indicator makes a concurrent breakout. On-balance volume is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book Granville’s New Key to Stock Market Profits. OBV oscillator is a good complement to both trend indicators of technical analysis and oscillators. If your strategy doesn’t take volume readings into account, this tool can be a great addition to recognizing the price trend.

Today, a lot of professional traders use this leading indicator for trading and analysis. The indicator considers volume and if the volume is pushing prices up or down. Its main purpose in technical analysis is to measure buying and selling pressure.

Bullish divergence

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 indicator should mostly be used on common stock, but works on futures contracts with some tuning and a shorter timeframe. This scan starts with a base of stocks that are averaging at least $10 in price and 100,000 daily volume over the last 60 days. 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.

Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. The Volume Oscillator identifies the trend in volumes with a system of two Exponential Moving Averages..The Volume… It’s mainly useful when in divergence with price as it shows unexpected strength or weakness. When both price and OBV are making lower peaks and lower troughs, the downward trend is likely to continue.

A buy order would be placed at the second touch of the trendline. The theory behind OBV is based on the distinction between smart money – namely, institutional investors – and less sophisticated retail investors. As mutual funds and pension funds begin to buy into an issue that retail investors are selling, volume may increase even as the price remains relatively level. At that point, larger investors begin to sell, and smaller investors begin buying. In other words, traders monitoring the on-balance volume in stock can expect to see a trend of increasing volume often arise before an uptrend in the stock price begins.

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Plotting Support and Resistance Lines With OBV

Let’s talk about on balance volume study in Thinkorswim . Joe Granville introduced the OBV in his 1963 book, Granville’s New Key to Stock Market Profits. The OBV is astudy that was developed to point out when divergence occurred between price action and volume. Granville suggested in his book that moves in volume come before moves in price. However, because it is a leading indicator, one of the indicator’s greatest limitations is due to the false positives it produces.

In the supplied example, a trader would spot a signal on OBV but would wait for a break of the 50-day moving average before actually taking a position. When the OBV provides more than one bearish divergence, the signal is exceptionally strong. In this example, OBV can be seen signaling not one but two bearish divergences.

The Forex OBV indicator appeared with the popularization of currency trading. It has become so popular among forex analysts that it is now included in the standard list of technical analysis tools. The Volume Price Trend is a volume momentum indicator.It makes use of both percentage changes in price and volume. It can be identified when the price keeps on rising while the OBV decreases.

On-Balance Volume Indicator (OBV) – “The Smart Money Indicator”

Only the relative change in the values compared with the previous data such as yesterday’s closing price and the current price movement matter, when trading with the OBV tools. For example, if the indicator is rising along with the price growth, it signals an uptrend’s strength. This indicator was originally designed for work in the stock market, later, it has been successfully used by Forex traders to measure buying and selling volumes of various assets. The creator of this indicator believed that the main driving force in the financial markets is volume.

There can be bullish and bearish divergence depending if there is a negative or a positive volume pressure. The OBV stands for On Balance Volume – a technical indicator that measures trading volume relative to the price change, of both up days and down days. Differently put, it allows one to check if the price movement corresponds to the buying or selling pressure or what trading volume corresponds to the price change. Joe Granville create the On Balance Volume indicator in the 1960s.

Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice. Trading and investing in financial markets involves risk. Like many other indicators which can give you wrong signals in lower time frames, OBV could mislead you in trading decisions too.

But, looking at the bigger picture—no investor can comment on what happened in terms of signals. Therefore, there is room for false positives and misinterpretations. The relative strength index is neutral and does not reflect any divergence against the price. However, in pattern analysis, it is seen breaking out from a falling trend line resistance . Already, the OBV is high, even before an actual price breakout. The indicator is monitored to forecast the trade direction and near-term price changes in stocks.

The OBV is also well-combined with other technical tools. I will cover all the aspects of trading with the OBV in this review. Analysts look to volume numbers on the OBV to track large, institutional investors. For example, institutional money may drive up the price of an asset, then sell after other investors jump on the bandwagon. Traders apply this indicator to determine price movements or when they want to confirm price trends.

What is the On-Balance Volume Indicator (OBV)?

Both moved steadily higher from November 2009 until October 2010. The On Balance Volume line is simply a running total of positive and negative volume. 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. When the price of an asset class like shares of a company are rising, you can confirm the continuation of the trend with OBV indicator.

On Balance Volume Indicator Interpretation: Reading the Charts

A stop loss is set according to the common principle, a little higher than the local high . We shall take the profit manually when the opposite reversal signal appears. Thus we have a higher risk of a loss, but the potential profit is also bigger this way. On the right side of the table, there are the price and the on-balance volume charts. They will be recalculated automatically after you enter new values into the table.

The technical indicator OBV helps one spot such breakouts. Traders use the previous OBV breakouts to filter false signals and understand the positive and negative volume outcomes. Amid this sharp price movement, the chart breaks out the red line in the OBV window. So, in this trading range, there is another bearish signal. Along with the entire down move, starting from the very beginning of the price fall, the indicator is following the price chart, confirming the bear trend continuation. The above chart is an example of how the OBV signals work together.

Since this oscillator does not have a specific minimum and maximum, just setting the maximum and minimum does not seem the best thing to do. Keep in mind that trading with margin may be subject to taxation. PrimeXBT shall not be responsible for withholding, collecting, reporting, 5 tips for finding developer jobs during paying, settling and/or remitting any taxes which may arise from Your participation in the trading with margin. The On-Balance Volume indicator is just one of many of the helpful studies and indicators that are included within PrimeXBT’s built-in charting software.

Volume Oscillator: The professional guide!

The chart shows a clear divergence between the price chart. The confining signal to enter a short is when the IBM price goes below the trendline, and the indicator breaks out the support level. https://traderevolution.net/ Note, the On Balance Volume serves as a filter and confirms the trendline breakout with a slight delay. Volume flow is a great way to identify money moving into a stock or out of a stock.

In this example, we looked at Facebook company share uptrend and how OBV indicator confirmed the uptrend with its increasing. The chart below shows an instance of divergence with the on-balance volume indicator. Marked with orange lines in about the middle of the chart, you can see where price continues to rise to a new high while the OBV indicator turns to the downside with a decline in volume. You use one of three possible calculations to get the current on-balance volume, the choice of which depends on the closing price of the traded financial asset . If the price rises, then the current volume is added to the previous curve value. And if the price remains at the same level, then the On Balance Volume value does not change either.