On Balance Volume (OBV) indicator – description of the indicator, its essence, view on the chart.
What is the On Balance Volume indicator and what is the meaning, calculation formula
In order to conduct a transaction, it is necessary to find such a market situation that the chances of making a profit are maximum. To do this, use the techniques of fundamental and technical analysis. However, thoughtless application will not lead to success. A trader must understand what is behind this or that data obtained with the help of technical indicators, only in this case he will be able to use them with maximum efficiency.
When a trend appears in the market, it is important to find confirmation of its reliability. For example, when quotes grow, you can be sure that asset purchases are more active than sales. Another important feature is the volume of ongoing transactions. If the price increase occurs with a small volume of trade, this will mean that it is unstable. Conversely, a movement in the market, which is accompanied by high activity, indicates the presence of serious reasons for the trend. OBV is intended for the trader to be able to assess the volume of purchases at the current time and compare it with previous indicators.
This indicator was first described by Joseph Granville in his book entitled A New Stock Market Strategy in 1963. The author substantiated the effectiveness of the indicator by the fact that the volume is actually the driving force behind changes in securities quotes.
If the user uses the On Balance Volume Indicator, he sees the volumes of market buying and selling. This indicator expresses the activity of conducting transactions for the purchase or sale of assets. The calculation is as follows:
- First, the direction of the candle is determined. If the closing price is higher than the opening price, then it is bullish. If less, then bearish.
- The volume of transactions carried out during the time corresponding to this candle is considered. For bullish this value is taken with a plus sign, for bearish – with a minus sign.
- The resulting value is added to the previous value of the OBV indicator.
In order to be able to use On Balance Volume, it is necessary that the relevant data be available. Information on the volume of transactions, for example, is available when trading stocks and bonds, but is only partial for transactions for the purchase and sale of currencies. Formation of the indicator chart:
How to use the balance volume indicator, settings, trading strategies
In most terminals, the indicator in question is one of the standard ones. It is a line whose values correspond to the volume of all transactions, which include both purchases and sales of securities. The method of use can be explained by the following example. If a trader sees an increase in stock quotes and at the same time fixes a growing OBV chart, then he has reason to conclude that the growth of quotations is stable. In such a situation, buying rather than selling shares will be more promising. On the other hand, if the OBV decreases with the growing chart, then this allows us to conclude that the trend is uncertain. If there were plans to buy the asset in question, then you need to analyze the situation again. Perhaps a more promising solution would be to wait for a trend reversal. If stock prices fall, then the fall of this indicator confirms the expectation that this process will continue. A decrease in the balance volume indicator indicates a low probability of its continuation. An important technique for working with this indicator is the use of divergence. Next, the technique will be explained using the example of a bullish trade execution. In this case, you need to pay attention to the following:
- During a downtrend, you need to draw a line connecting the peaks of the quotes chart, pointing down. The resulting straight line should go down.
- At the time points corresponding to these peaks, you need to pay attention to the OBV plot.
- You need to draw a line that connects the corresponding points. If it has an increasing direction, then we can conclude that there is a divergence.
The above is explained in the following image. An example of applying divergence:
It should be borne in mind that the construction described here can often be done in several ways. The presence of divergence in the case under consideration indicates the weakness of the downtrend and its possible imminent change. On an uptrend, constructions are carried out in a similar way. Using OBV does not give a clear answer to whether it is worth entering a trade now. However, if used in conjunction with other technical analysis tools, it can become part of a profitable trading system. For example, the presence of a rebound of On Balance Volume from the drawn line may represent a good opportunity to enter a trade at the very beginning of a new trend. After entering the trade, it is necessary to properly exit. To do this, you can use, for example, OBV divergence, which will warn of an imminent market reversal in the opposite direction. When working with OBV, you can also use channels. For example, if the indicator has an increasing one that breaks in the downside direction, then this can become a signal for a profitable bearish trade. This is illustrated by the following example. Channel breakout usage:
The use of On Balance Volume can help in analyzing the breakdown of the instrument’s quotes channel. If the price went beyond its limits, you need to see how the indicator changed. If at this point it will grow, then this can be considered a confirmation of the breakdown. If it falls, then it is better to treat it with caution. This method of operation can, in particular, be used in the breakdown of a flat channel. Price Channel Breakout:
This indicator can be used to confirm a price trend. If quotes and OBVs are unidirectional, it increases the likelihood that they will continue. Trend Confirmation:
Another type of signal is the intersection of the On Balance Volume chart with its moving average. When the indicator in such a situation goes from bottom to top, then we can talk about buying assets, and if from top to bottom, then about selling. Using signals from the intersection of OBV and its moving average:
When to use OBV, on which instruments and vice versa, when not to use
Using the on-balance volume indicator is beneficial when there is an uptrend or downtrend. When lateral, it does not give reliable signals. When a trader using one of the signals of this indicator sees an opportunity to enter a profitable trade, he must wait for confirmation. It can be obtained using oscillator signals or after the appearance of the appropriate combination of
Japanese candlesticks . The simplest way is to check the closing prices of the next two or three bars. If they confirm the new trend direction, the trade is highly likely to be profitable. On Balance Volume (OBV) indicator – how to use the indicator in trading: https://youtu.be/_EP-klQaI90
Pros and cons
The strength of OBV is the lack of lag. Since no average values are used here, the resulting value will reflect the state at the current moment. This indicator creates reliable and distinct indications that can become a useful part of a trader’s trading system. One of the most significant is the use of divergence. OBV combines high efficiency and ease of operation. The disadvantage is that it is significantly less useful when working in sideways trends. The indicator does not contain information about asset prices.
Application in different terminals
The Balance Volume indicator is usually included in the standard set. In order to use it, you need to do the following:
- You need to select the instrument with which you will work, as well as specify the timeframe.
- Go to the list of available indicators for the terminal you are using, select OBV and activate it.
- Next, you need to enter the required parameters.
After confirming the input, the indicator will appear in a separate window. For the calculation, you need to specify what value of the bar is used. Normally Close is selected by default. On various terminals, the following may be used instead:
- The maximum or minimum value.
- Median price ( (Max + Min) / 2 ).
- Typical value is ( ( Max + Min + Close ) / 3 ).
- Weighted closing price ( ( Max + Min + 2 * Close ) / 4.
- Open – the opening price.
The trader should choose the value that, from his point of view, will be the most informative and will be able to create reliable signals. You will need to specify the visual characteristics of the chart – the thickness, color and type of the line, whether it is necessary to fix the maximum and minimum.
- 1 What is the On Balance Volume indicator and what is the meaning, calculation formula
- 2 How to use the balance volume indicator, settings, trading strategies
- 3 When to use OBV, on which instruments and vice versa, when not to use
- 4 Pros and cons
- 5 Application in different terminals