- Type of Indicator: Volume
- Creator: Joseph Granville
- When Created: 1960s
- First Mentioned In: Granville’s New Key to Stock Market Profits by Joseph Granville.
What Is The On-Balance Volume?
The On-Balance Volume (OBV) is a technical analysis indicator developed by Joseph Granville. The OBV is a cumulative volume-based indicator that measures buying and selling pressure in the market. It does this by adding the volume on up days and subtracting the volume on down days. The main idea behind the OBV is that volume often precedes price. This means that changes in the OBV can potentially signal upcoming price movements.
The OBV is particularly useful for confirming price trends or identifying potential trend reversals. By comparing the OBV to the price action of a security, traders can assess the strength of the underlying trend. Crypto trader can also look for divergences that may signal a change in the market direction.
How Do You Read The OBV?
The OBV provides traders with valuable information about the buying and selling pressure in a market.
When the OBV is rising, it indicates that there is more buying pressure than selling pressure, suggesting that the price may continue to rise.
Conversely, when the OBV is falling, it indicates that there is more selling pressure than buying pressure, suggesting that the price may continue to fall.
Additionally, the OBV can help traders identify potential market turning points by highlighting divergences between the OBV and the price action.
When the OBV is rising while the price is falling, it suggests a bullish divergence and a possible reversal to the upside.
Conversely, when the OBV is falling while the price is rising, it suggests a bearish divergence and a possible reversal to the downside.
How Does The OBV Work?
The OBV works by cumulatively adding or subtracting the volume of a security based on whether the closing price is higher or lower than the previous day’s closing price. If the closing price is higher, the volume is added to the OBV. If the closing price is lower, the volume is subtracted from the OBV.
How Is The On-Balance Volume Calculated?
Increasing OBV: If today’s closing price is higher than yesterday’s closing price: OBV = Previous OBV + Today’s Volume
Decreasing OBV: If today’s closing price is lower than yesterday’s closing price: OBV = Previous OBV – Today’s Volume
No Change in OBV: If today’s closing price is equal to yesterday’s closing price: OBV = Previous OBV (no change)
The Encyclopedia Of Technical Market Indicators, Second Edition
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Trend confirmation: If the price and the OBV are both rising or falling, it confirms the strength of the trend. A rising OBV during an uptrend indicates strong buying pressure. A falling OBV during a downtrend indicates strong selling pressure.
Divergences: Bullish divergences occur when the price makes a lower low, but the OBV makes a higher low. Bearish divergences occur when the price makes a higher high, but the OBV makes a lower high. Divergences can signal potential trend reversals.
Additional Trading & Risk Management Tips
Use the On-Balance Volume in conjunction with other technical indicators and chart patterns to improve the accuracy of trading signals.
Be cautious when relying solely on the OBV, as it can generate false signals in certain market conditions, such as during strong price reversals or volatile, choppy markets.
Practice proper risk management techniques to protect your investments. Always consider other factors in addition to the OBV when making trading decisions.
Use the OBV in combination with other momentum or trend-following indicators to confirm the strength and direction of the trend. This can potentially lead to more accurate and reliable trading signals.
Be aware that the OBV may perform differently in different market conditions, so it’s essential to stay flexible and adapt your trading strategy as needed.
Consider using the tool in conjunction with support and resistance levels or trendlines to confirm potential entry and exit points or to identify areas of confluence.
Test the OBV on historical data to evaluate its effectiveness for your specific trading style and market conditions before incorporating it into your live trading strategy. Practice using the On-Balance Volume using a TradingView account to backtest performance.