On-Balance Volume (OBV)

Understanding On-Balance Volume (OBV)

On-Balance Volume (OBV) is a method used to forecast changes in the price of an asset by considering changes in volume. It is a composite indicator that calculates the accumulation of volume on up days and the subtraction of volume on down days to evaluate buying and selling pressure.

According to the principle of OBV, when the price of an asset closes higher than the previous close, the volume for the 24-hour period is considered “up-volume.” Conversely, when the price of the asset closes lower than its previous close, the entire day’s volume is considered “down-volume.” OBV is only applicable to markets with exchange volume, similar to other volume-based indicators like the Klinger oscillator, money flow index, and negative volume index.

The creator of On-Balance Volume (OBV) is Joseph Granville. Granville believed that volume plays a crucial role in the functioning of financial markets and that price movements are largely influenced by volume. He argued that if the market volume of an asset experiences a significant increase, the price will eventually see a substantial spike, either upwards or downwards.

The calculation of On-Balance Volume (OBV) is relatively simple and depends on the closing price:

• If the 24-hour closing price is below the previous close price, OBV = Previous OBV – Current Day’s Volume.
• If the 24-hour closing price is equal to the previous close price, OBV = Previous OBV.
• If the 24-hour closing price is above the previous close price, OBV = Current Day’s Volume + Previous OBV.

It is important to note that the absolute value of OBV is not significant. Instead, it is the OBV line that determines market trends.

1. The first step in analyzing OBV is to identify the trend.
2. Next, assess whether the current trend aligns with the trend for the underlying asset.
3. Identify support and resistance levels and mark them accordingly.
4. Once the OBV lines break their resistance levels, accurate signals can be generated to determine the upward or downward direction of the asset.

When looking for resistance breaks, consider the closing prices that play a crucial role in the OBV realm. However, the OBV indicator may become unreliable during periods of sharp volume spikes. In such cases, traders should wait for the settling period to be over.

Divergence signals can help predict trend reversals in the bullish or bearish direction. These signals are based on the concept that volume precedes price, similar to OBV. A bearish divergence occurs when OBV goes down or closes lower than its previous low. Conversely, a bullish divergence occurs when OBV rises and closes at a higher price than its previous close.

It is important to note that OBV alone is insufficient to predict bullish and bearish trends in the market. Other technical indicators such as MACD, RSI, and ADV are also necessary for comprehensive analysis.