How to use on balance volume: Technical Analysis from A to Z On Balance Volume

How to use on balance volume

How to use on balance volume

The system allows you to trade by yourself or copy successful traders from all across the globe. The On Balance Volume doesn’t consider the strength of the price move. For example, the signals are not distorted by the new releases. The TrueT OBV Divergence analyzes the last 300 visible bars and paints diverging lines in the On Balance Volume window.

For cryptocurrency, you’ll want to look at how many trades are occurring and how much currency is being exchanged per trade. The most basic term to understand before looking at on-balance volume is volume. Essentially, volume is how many shares of a stock, security, or market are bought and sold during a set period of time. You can set the period of time to whatever metric you would like.

The On Balance Volume is a leading indicator that measures the volume changes to make daily volume price predictions and recognize incorrect prevailing trends. It is based on the theory that a significant price movement always follows a sharp change in the trading volume. For example, when large traders invest in securities, the trade volume, and the stock price increase.

The divergence between OBV and price should alert chartists that a price reversal could be in the making. To better forecast the shifts in the price direction, we pair the OBV with a 20-day moving average. As you can see, the OBV follows the MA very closely in some parts of the chart. The reason is that we chose a widely volatile period for the particular instrument. In general, when you analyze bigger time frames , the volatility will be lower.

How to use on balance volume

You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money. The volume indicator also helps identify false breakouts. False breakout situations occur when there is a declining volume or even a little increase over a breakout. This indicates a lack of interest and should serve as a warning sign for a higher probability of a false breakout.

One useful indicator from traditional stock market technical analysis is on-balance volume. Similar to the RSI indicator, OBV can also reveal potential periods of “smart money” accumulation. The idea here is that volume often precedes price action. Since OBV is an indicator based on volume momentum, periods of OBV divergence against price may indicate “smart money” buying into retail investor sells, or vice versa. The A/D indicator factors in the driving forces behind price movements.

On-Balance Volume Calculation

Let’s now look at an example of how to use the on-balance volume to spot situations where the trend bounces off the general price line and reverses its movement. For the purpose of this example, we will use the GOOGL stock. However, to apply this move, it is essential to keep in mind that a price change on a little volume isn’t a strong signal. It is always better to act on a price change on a higher volume. That’s because this indicates that something has changed fundamentally.

Once a trend is established, it remains in force until it is broken. The first occurs when the trend changes from a rising trend to a falling trend, or from a falling trend to a rising trend. For traders and investors alike, a deep insight into historic performance is invaluable.

A negative on-balance volume means two things – 1) today’s price is lower than yesterday’s closing price; 2) today’s trading volume is higher than yesterday’s trading volume. A negative on-balance volume usually signals an increased selling pressure and a potential bearish trend. To do that, traders start by identifying powerful support and resistance levels. In many instances, the OBV can help confirm a breakout even before the price goes up/down. The reason is that volume is often a clear representation of the buying/selling pressure and factors traders’ behavior before the price starts to reflect it. So, we have studied how the OBV index forex works, how to read OBV signals, and how to interpret the on balance volume chart.

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OBV was developed by Joe Granville and introduced in his 1963 book Granville’s New Key to Stock Market Profits. It was one of the first indicators to measure positive and negative volume flow. Chartists can look for divergences between OBV and price to predict price movements or use OBV to confirm price trends.

On Balance Volume (OBV)

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Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. WAG caught prices within a trading range, and many more bad OBV signals emerged. The slope of the OBV WMA stayed negative and implied that ‘smart money’ did not take part in that upwards swing. Following the trading rules, we shorted at the red arrow as the WMA turned down.

Technical analysis is a way of predicting the future price of a security based on past price data. Many different technical indicators can be used, but some of the most popular ones include moving averages, support and resistance levels, and Fibonacci levels. The On Balance Volume doesn’t contain any percentage scale or levels like more common oscillators such as relative strength index.

The OBV trading tool shows the positive and negative volume of an asset like a stock price. If you see a sharp rise in the indicator line, it signals that big traders are entering the market. A strong on balance volume momentum is a trend reversal signal if it goes against the trend. It confirms the trend continuation when the indicator and the trading volume on the chart are going in the same direction. On Balance Volume is a simple indicator that uses volume and price to measure buying pressure and selling pressure. Buying pressure is evident when positive volume exceeds negative volume and the OBV line rises.

How to use currency strength meter

The settings are pre-defined since the on-balance volume automatically adjusts its values based on the automated calculations it makes. Earlier we mentioned that traders use the OBV indicator to spot institutional and small investors’ presence. Now let’s get practical and see how you can capitalize on it. On-Balance Volume can also be used to determine the strength of a trend, and if that trend is likely to continue or not. Waiting for a break in the sequence of highs or lows will signal the trend is about to end.

Short-term price spikes or dives, flash crashes, trades cancellation – all these factors typical for nowadays’ markets affect the trading volume and destabilize prices. This can drive the OBV out-of-bounds and lead to increased generation of false signals. 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. TheBTCUSD chart above displays one of the most common lagging indicators, the bearish divergence. So, we expect the down days to come and we open a short position.

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

If the security’s price movement precedes OBV movement, a “non-confirmation” has occurred. Non-confirma-tions can occur at bull market tops or at bear market bottoms . As you can see, the break of this trendline coincides with the price top and precedes the large price drop. This would have been a good short or sell indicator, especially when confluence with other indicators can be observed. It’s also worth watching OBV support and resistance breaks.

Similarly, a falling volume trend indicates a consequent fall in stock price. Take advantage of the instrument, filter false reversal signals, and check the trend strength. For example, if the sharp price rise is confirmed by a hardly noticeable move of the OBV line, an inexperienced trader could see it as a reversal signal.

You could place a trailing stop-loss order at 8% so that if the price falls back to that level, your trade will be automatically closed. Another way to protect your profits is to use trailing stop-loss orders. With this type of order, your stop loss will automatically move up as the stock price moves in your favor. Conversely, if you’re looking at a daily chart and you see that the OBV is making lower highs and lower lows, you would enter short trades when the OBV makes a new low.

His expertise covers all corners of the financial industry, having worked as a consultant to big financial institutions, FinTech companies, and rising blockchain startups. However, in the context of today’s market environment, it isn’t worth using on its own. Using the OBV as the only indicator to base your strategy on is a recipe for disaster. Think of the OBV as the more complete indicator and of the cumulative delta volume as the niche indicator. While the OBV provides you with a broader snapshot, the cumulative delta indicator shows only the extremes. However, you can always change the color or the thickness of the indicator’s line if you find this important for smoother user experience.