The OBV Indicator – On Balance Volume was developed by Joe Granville and introduced in 1963 through the publication of his book ‘Granville’s New Key to Stock Market Profits.’
Granville observed that volumes anticipate prices: the OBV tends to rise when volumes in bullish sessions exceed the volumes of bullish sessions while the OBV drops when the volume is higher on low days.
Granville also noticed that the OBV was moving much earlier than the price.
This indicator was one of the first to correctly measure the flow of volumes in and out based on a financial instrument.
The On Balance Volume (OBV) Technical Indicator measures pressure on both the buyers ‘and sellers’ sides.
It was one of the first indicators designed to measure the flow of volumes into and out of a financial instrument.
This type of indicator adds volume on days when movements are positive and subtract other volumes when days are down.
OBV Indicator Formula and Calculation
The Technical Indicator On Balance Volume (OBV) performs a calculation on the total of negative and positive volumes.
The period of a volume is positive when the close is above the previous close.
The volume of a period is negative when the current close is below the previous close.
OBV is an expression of the following formula:
IF[C0-C1]>0: I = +V>
IF[C0-C1]<0: I = -V
OBV = OBV+I
I = previous period’s OBV value
CO = current closure
C1 = closure of the previous day
If the price closure is above the previous price closure then:
OBV Current = Previous OBV + Current Volume
If the price closure + below the previous price closure:
OBV Current = Previous OBV – Current Volume
If the closing prices are equivalent to the previous closing price then:
OBV Current = Previous OBV (no change)
The OBV indicator, therefore, corresponds to a simple sum that is updated from period to period based on prices and volumes in the last time interval.
Volume on balance is straightforward; it is a line that represents volumes.
How to use the On Balance Volume Indicator
The Technical On Balance Volume Indicator (OBV) rises when the volume on days where the movement is “up” exceeds the volume on negative days.
A rising Technical On Balance Volume (OBV) Indicator reflects the positive pressure of the volume that can lead to higher prices.
A decreasing Technical On Balance Volume (OBV) Indicator reflects the negative pressure of volumes that can drive prices down.
It is always good to expect prices to move upwards in the event of OBV growth while prices are in the lateral range or moving in a downward trend.
Instead, we should expect prices to move downwards if the OBV indicator is falling, while prices are either sideways or on an upward trend.
The absolute value of OBV is not necessarily meaningful.
You will need to focus your attention on the OBV line features.
The most important thing is to identify the OBV trend, then determine if this trend corresponds to that of the market price.
We must first define the OBV trend, then check if this trend corresponds to the current price trend.
Finally, you will need to identify potential supports and resistors.
Once these levels are broken, the trend for OBV will change, and these breaks can be used to generate signals.
Divergences Trading Signals
To capture momentum variations through OBV, we need to be clear about the concept of trend.
The trend of the OBV, compared to the price trend, maybe:
- convergent: in this case, the indication is that of a strengthening of the current trend and momentum;
- divergent: in this case, the evidence is that of a loss of force of the current trend, and therefore a signal to reverse the momentum.
The most effective predictive capabilities of the OBV indicator occur in the event of a divergence from price developments, as described in the following example.
When creating divergences between OBV and prices, these can be used to anticipate a change in trend.
These input signals are based on the theory already described that the evolution of volumes anticipates price movements.
An upward divergence is formed when the OBV forms increasing lows, while prices form decreasing lows.
On the other hand, a downward divergence is formed when the OBV forms decreasing highs, while prices form increasing highs.
Of course, we can also look for reverse differences.
Reverse divergences arise when the inflow of money into and out of the country does not develop similarly on prices.
The predictive effectiveness of the OBV indicator must, therefore, be sought above all in the divergences that its trend reveals about the price.
OBV, On Balance Volume, is, therefore, an extremely reliable and useful technical indicator to be integrated into your online trading strategy.
This powerful indicator uses volume flow to predict changes in an underlying.
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