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>Forex Trading >On-Balance Volume Reveals Market Players’ Strategy

On-Balance Volume Reveals Market Players’ Strategy

While the OBV provides you with a broader snapshot, the cumulative delta indicator shows only the extremes. 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.

Another note of caution in using the OBV is that a large spike in volume on a single day can throw off the indicator for quite a while. When price continues to make higher peaks and OBV forex spread explained fails to make higher peaks, the upward trend is likely to stall or fail. During a trading range, if the OBV is falling, distribution may be taking place—a warning of a downward breakout.

Retail investors often don’t want to lose out on capitalizing on potentially stable market momentum. That is why they join the crowd once the price starts going up. And this is when institutional investors start reaping profits by selling to the retail investors who had just joined the bandwagon.

  • According to the OBV principle, the 24-hour volume is deemed ‘up-volume’ when an asset’s price closes higher than the previous close.
  • The chart below shows an instance of divergence with the on-balance volume indicator.
  • The relative strength index is neutral and does not reflect any divergence against the price.
  • A further bearish divergence occurs – price makes an equal high and OBV makes a lower high.
  • OBV lifts to a multiyear high in September while the price is still trading under the prior year’s high, triggering a bullish divergence that predicts the strong December breakout.

Therefore, it is recommended that you fist look at the trend of the asset and then identify whether it matches with the OBV indicator. As the name suggests, On Balance Volume is a volume-based indicator. Volume indicators use the concept of volumes to help traders make better decisions.

How to Read On-Balance Volume

The On Balance Volume study calculates the n-day OBV for each day and charts it as a line or histogram which can oscillate around the zero line. Volume Zone Oscillator is an indicator that presents a different way of looking at OBV. VZO is a difference between OBV and an exponential moving average. And in this way we can observe the strength of the movements, overbought and oversold and divergences.

on balance volume indicator

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. During a trading range, if the OBV is rising, accumulation may be taking place—a warning of an upward breakout. With any trading strategy, you should conduct extensive testing before you risk real money. You can think of this as a less dramatic form of divergence.


For example, if the price increases, the volume is added to the OBV. There is also a third scenario where the price remains stable. OBV Period -Number of periods over which to sum the up and down volumes. Tuned is not a broker-dealer, exchange, custodian, wallet provider, or counterparty. Tuned is only suitable for investors who fully understand the risk of loss and may experience large drawdowns.

on balance volume indicator

Full BioPete Rathburn is a freelance writer, copy editor, and fact-checker with expertise in economics and personal finance. When both price and OBV are making higher peaks and higher troughs, atfx review the upward trend is likely to continue. Using a fints object for the Data argument of onbalvol is not recommended. Use a matrix, timetable, or table instead for financial time series.

Examples of OBV

The rally fails, giving way to a sell-off that reaches an 11-month low in April. The stock then enters an accumulation phase, with OBV and price ticking higher in unison for seven months. OBV lifts to a multiyear high in September while the price is still trading under the prior year’s high, triggering a bullish divergence that predicts the strong December breakout. The formula generates a smooth indicator line that carves out highs, lows, and trendlines similar to price bars.

on balance volume indicator

The chart below shows an instance of divergence with the on-balance volume indicator. Marked with orange lines in about the middle of the chart, you can see where price continues to rise to a new high while the OBV indicator turns to the downside with a decline in volume. According to Granville, changes in volume – both in the amount of volume and in the trend of volume – are often a leading indicator of changes in a stock’s price. In other words, a bullish divergence forms when the OBV is rising while the stock is falling.

Setting It Up In Your Charts

On-balance volume is a momentum volume-based indicator widely implemented by many traders in various markets. It’s a leading technical tool that allows investors to foresee potential asset price movements, confirm the market trend, identify and trade on divergencies. However, like any other indicator, OBV is prone to some pitfalls. It may send some misleading signals and lack efficiency in a smaller timeframe. 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.

Aside from that, though, the indicators are quite different. The trader shouldn’t rely on the OBV indicator as to the core pillar of their strategy. It is just a tool to complement a stable and time-tested strategy. Trading on volume analysis on its own isn’t viable in today’s markets. The On Balance Volume for an n-day period is defined as the sum of all volumes for up days minus all volumes for down days. An up day is one where the price closed higher or the same as the previous day.

An offset of 1 returns the value from the previous bar instead of the current bar. The OBV is an efficient momentum indicator that can be implemented by investors in several ways. A higher low is when the price of a cryptocurrency closes at a level that is higher than the close of the p…

A bullish divergence forms when OBV moves higher or forms a higher low even as prices move lower or forge a lower low. 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 legacy fx review could be in the making. Traders may expect the uptrend when the asset price shows lower lows but the OBV indicator starts to grow. Conversely, when the asset price continues growing while the OBV starts to decline, there is a possibility of a downtrend. This is not to say that one indicator is better than the other.

It also doesn’t scale well, with intraday and weekly OBV failing to produce consistently reliable signals. Investors can use OBV to provide many key predictions, such as a bullish divergence predicting the price will break resistance or a bearish divergence predicting a rally will stall or reverse. In other words, traders monitoring the on-balance volume in stock can expect to see a trend of increasing volume often arise before an uptrend in the stock price begins. Conversely, a falling volume trend is interpreted as a signal that the stock price itself is likely to enter a corresponding downtrend soon. Total volume for each day is assigned a positive or negative value depending on prices being higher or lower that day.

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