On-Balance Volume: The Way To Smart Money

The divergence occurs when the stock price and volume move in opposite directions or when the price move is not as great as the volume on a chart. Divergence can be an indication of an imminent positive or negative price move. Divergence is one of the most complex signals and one that can give less experienced investors false signals. Because the OBV indicator is considered a leading indicator, it can lead to false signals. For traders that want to get the early signals that the OBV indicator provides, but prefer to play it safe and wait for confirmation, traders can combine the tool with various moving averages.

  • TheBTCUSD chart above displays one of the most common lagging indicators, the bearish divergence.
  • The On Balance Volume doesn’t consider the strength of the price move.
  • If there is positive volume pressure, the curved line goes up following the price rise.
  • This trend can be detected much before the rise in stock prices.

A rising OBV line can tell potential upward breakout because accumulation is in place. A reducing on-balance volume line may indicate potential price breakdowns because of the distribution. When the price action reduces and OBV increases, you can expect upward movements.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Intraday trading is similar in terms of spotting and reading the OBV signals. The values of the indicator do not depend on the period, unlike other, more popular oscillators. Intraday on balance volume trading strategy suggests trading in the previous OBV charts from M5 to M30. The green line in the above chart marks a bullish trend where the closing price is higher than the previous one. Therefore, while we measure positive today’s volume the line is getting up and the uptrend strength is confirmed.

On Balance Volume Indicator Interpretation: Reading the Charts

Granville noted in his research that OBV would often move before price. 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. Combining the OBV indicator with other forms of technical analysis, such as trend lines or moving averages, or even other indicators, can help to confirm the early signals the OBV indicator provides.

on balance volume indicator

The divergence between the OBV indicator and the current price trend often signals an impending trend change. The initial interpretation of the signal confirms the trend line breakout in the on balance volume window. As expected, the fast EMA 12 breaks through the slow EMA 34 downside a little later .

Using the On-Balance Volume Indicator

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. 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. Sometimes OBV moves step-for-step with the underlying security. In this case, OBV is confirming the strength of the underlying trend, be it down or up. The chart for Autozone shows prices as a black line and OBV as a pink line.

BBY broke its uptrend line in late April and OBV confirmed with a support break in early May. BBY broke its downtrend line in early September and OBV confirmed with a trend line break a week later. These coincident signals indicated that positive and negative volume were in harmony with price. Bullish and bearish divergence signals can be used to anticipate a trend reversal. These signals are truly based on the theory that volume precedes prices. A bullish divergence forms when OBV moves higher or forms a higher low even as prices move lower or forge a lower low.

Similarly, a falling volume trend indicates a consequent fall in stock price. The term “smart money” begins to appear crystal clear—the institutions are buying the stock of the “average Joe” at the bottom and then selling it back to him at or near the top. You can also see how OBV can suggest major trendline turnarounds. It appears that as institutions begin to buy into an issue that retail investors are still selling, volume increases as the price is still slightly falling or leveling out. Granville felt that volume was the driving force behind the markets, and designed OBV to project when major moves in the markets would occur. In his book, he described the increase or decrease of his indicator, setting new highs or lows, as “a spring being wound tightly.”

On-Balance Volume (OBV): Definition, Formula, and Uses as Indicator

The values written in the pink columns are just an example of how the volume begins and the stock price is changing. You should delete them when you work with the excel sheet. If you do not know today’s volume level, you can find it out using a common tool Volume.

As with all indicators, it is important to use OBV in conjunction with other aspects of technical analysis. OBV can be combined with basic pattern analysis or to confirm signals from momentum oscillators. The OBV trading tool shows the positive and negative volume of an asset like a stock price. If you see the scrum team vs the development team 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 indicator

In 1946, stock analysts Woods and Vignola developed a technique, called initially “continuous volume”, that became the On Balance Volume prototype. Covariance is an evaluation of the directional relationship between the returns of two assets. When both price and OBV are making higher peaks and higher troughs, the upward trend is likely to continue. Master excel formulas, graphs, shortcuts with 3+hrs of Video.

In the same way, for a bullish divergence, the price will display lower lows while the indicator shows higher lows. It is plotted on a price chart, but the individual quantitative value remains irrelevant. The OBV real value arbitrarily depends on the start date.

Сonsider all divergences in the OBV index and the data on the chart, not just common divergences in order to understand future price movements. Also, use breakouts of the key levels and other chart patterns in the Balance Volume window. You can combine the On Balance Volume with other technical analysis momentum indicators to filter and confirm signals to buy or sell.

How Do You Calculate On Balance Volume?

When the price shows higher highs and on-balance volume has lower highs, it means it is a sign of a bearish divergence. Here is an example of trend lines showing divergence between the python exponential function OBV and price action. Accumulation Distribution looks at the proximity of closing prices to their highs or lows to determine if accumulation or distribution is occurring in the market.

Intraday Trading with OBV

Accordingly, in a downtrend divergence occurs when price mark a lower low but OBV indicates a higher low. In contrast, whenever the daily price of the bitcoin goes down, OBV decreases by the bitcoin volume amount. Whenever the daily price of the bitcoin goes up, Then OBV increases by the bitcoin volume amount accordingly. By putting these trading strategies into regular practice and using up to 1000x leverage, PrimeXBT can help a trader to grow their profits and minimize risk. Read this guide for a full OBV definition to explain what is OBV, the OBV formula for calculation, how to read the On-Balance Volume indicator, and OBV trading strategies.

When the bitcoin price goes down to the first target at the distance of the stop loss, we move the stop loss to the breakeven. The TrueT OBV Divergence analyzes the last 300 visible bars and paints diverging lines in the On Balance Volume window. A great benefit of this tool is the alert signaling divergence and many additional settings https://forexhero.info/ compared to the classical version. I covered the divergence signals in detail in the article Divergence and Convergence in Forex. The OBV divergence works in the same way as with other technical tools for a period’s volume. You can set the chart, to which the indicator formula is applied, set the line color, and add highs and lows.

How to Trade Forex with On Balance Volume Indicator

The up days show a daily volume increase and the line goes up while the on-balance volumes are gradually declining. A Bollinger Band® is a momentum indicator used in technical analysis that depicts two standard deviations above and below a simple moving average. Despite being plotted on a price chart and measured numerically, the actual individual quantitative value of OBV is not relevant. The indicator itself is cumulative, while the time interval remains fixed by a dedicated starting point, meaning the real number value of OBV arbitrarily depends on the start date. Instead, traders and analysts look to the nature of OBV movements over time; the slope of the OBV line carries all of the weight of analysis. Despite being plotted on a price chart and measured numerically, the real individual quantitative value of OBV is not significant.

The content on this website is provided for informational purposes only and is not intended to constitute professional financial advice. The content is provided on an as-is and as-available basis. Trading any financial instrument involves a significant risk of loss.

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