On balance volume indicator: What Is OBV? On Balance Volume
If the OBV line also breaks through the levels, the breakout is true. You should also remember that the OBV signals usually happen a few bars before the price movement. The OBV is a momentum indicator that measures positive and negative volume changes to predict price movements.
Note that the chart indicates a downtrend while the on balance volume line starts rising gradually. Finally, the trend reverses, and instead of a bearish outcome, a bullish trend starts . 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. With the help of these charts, you will be able to carry out the same analysis as in the trading terminal. Later on, the On-Balance Volume indicator was developed by a prominent financial analyst, Joseph E. Granville.
Experts recommend interpreting the OBV changes together with the price chart moves. If the OBV value is rising along with the price, the trend should continue. If the OBV value goes down while the price goes up , the trend should reverse.
The indicator simply runs a total of positive and negative volume. A period is usually said to be positive when the close is above the previous close. It is said to be negative when its close is below the previous close. The formula used to create the accumulation/distribution (Acc/Dist) line is quite different than the OBV shown above.
This signal works in a similar way when the price chart breaks out key levels. The breakout of the OBV key level is often followed by a sharp price momentum in the direction corresponding to the breakout. Total volume for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value.
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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. How to filter off market noise with the Laguerre polynomials. Description of Laguerre RSI parameters and forex trading strategies with Laguerre RSI indicator. A surge in trading volume can result in an unreasonably sharp jump of the indicator and give a false signal on the closing price.
Another strategy of using the on-balance volume is to combine it with another indicator. The most popular way, as stated above, is to combine it with a moving average and find the crossovers. These indicators are developed by using several mathematical calculations. OBV can be used to confirm a price trend, upside breakout or downside break. The chart for Best Buy shows three confirming signals as well as confirmation of the price trend. OBV and BBY moved lower in December-January, higher from March to April, lower from May to August and higher from September to October.
What does the on-balance volume indicator tell you?
DTTW™ is proud to be the lead sponsor of TraderTV.LIVE™, the fastest-growing day trading channel on YouTube. It is a bit hard to identify divergences using the indicator. Also, you need to know that OBV works well on trending markets.
A bearish divergence forms when OBV moves lower or forms a lower low even as prices move higher or forge a higher high. The divergence between OBV and price should alert chartists that a price reversal could be in the making. OBV rises when volume on up days outpaces volume on down days. A rising OBV reflects positive volume pressure that can lead to higher prices. Conversely, falling OBV reflects negative volume pressure that can foreshadow lower prices. Granville noted in his research that OBV would often move before price.
To make the OBV formula as clear as possible, I prepared a calculation model in Excel. You can set the chart, to which the indicator formula is applied, set the line color, and add highs and lows. If the on balance volume line breaks through the MA upside, it is a buy signal. When the OBV breaks through the MA downside, it is a sell signal.
On-balance volume is a technical indicator of momentum, using volume changes to make price predictions. Fibonacci Retracement indicator MA Channels FIBO. Secrets of successful trading with Fibonacci lines. A detailed description of the Fibonacci trading strategy with examples. 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.
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You need a long trading history to carry out the market analysis effectively and not only yesterday’s and today’s closing price. The signals in medium-term timeframes are entirely accurate showing a positive or negative volume. Or the price and the indicator line stop close to the support or resistance level. To trade the MA and OBV forex strategy, you need to add two exponential moving averages with periods 34 and 12. As you see from the above chart, the IBM price goes down after we enter a short. There is forming a bear wedge that signals a reversal.
Expect prices to move higher if OBV is rising while prices are either flat or moving down. Expect prices to move lower if OBV is falling while prices are either flat or moving up. When the current closing price is higher than the previous closing price, the current volume is added to the previous trading volume. When the current closing price is lower than yesterday’s close, the current volume is subtracted from the previous trade volume. The OBV doesn’t consider the strength of the price movement.
It has become so popular among forex analysts that it is now included in the standard list of technical analysis tools. The On-Balance-Volume is an important technical indicator in the market, although not suitable for day traders. It appears as a single line that tends not to tell a lot about a financial asset. However, when used well, it can help you identify where to buy or sell an asset. The uptrend starts fading as the OBV indicator starts moving sideways.
One way of using the on balance volume is to follow and confirm a trend, as shown on the chart below. As seen, the price of EUR/USD pair rose when the OBV indicator was on an upward trend. The price started to decline when the OBV was declining.
The uptrend in OBV reversed with the break below the February low. Volume ultimately won the day as MDT followed volume lower with a decline into the low 30s. The second chart shows Valero Energy with OBV forming a bearish divergence in April and a confirming support break in May. OBV signals cannot be the basis of a trading strategy and must be confirmed by signals from other technical analysis tools. The chart schematically displays a bearish divergence .
The up days show a daily volume increase and the line goes up while the on-balance volumes are gradually declining. At the reversal point, there is a strong indicator momentum where the volume begins to fall. This signal means strong selling pressure, which confirms that the uptrend should soon turn to a significant bearish outcome. If there is positive volume pressure, the curved line goes up following the price rise.
How to Use the OBV Indicator? On-Balance Volume Strategies
Positive volume remained strong throughout the advance. 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.
Divergence occurs when the indicator and the daily volume on the chart go in opposite directions. There can be bullish and bearish divergence depending if there is a negative or a positive volume pressure. The chart shows a clear divergence between the price chart. This bearish divergence signals a soon trend reversal. The confining signal to enter a short is when the IBM price goes below the trendline, and the indicator breaks out the support level. Note, the On Balance Volume serves as a filter and confirms the trendline breakout with a slight delay.
The OBV shows the sentiment of big traders and the crowd to predict a bullish or bearish momentum. You can read detailed instructions on adding indicators to the MT4 charts in the articleBollinger Bands Indicator in Forex Explained. Therefore, it is easy to use the indicator when the price is rising. Another way of using the indicator is to find when a currency pair or stock wants to diverge and move lower.