Always ensure you have confirmation from additional analysis or indicators beyond the OBV to make informed trading decisions. By recognizing these risks and limitations, your use of OBV can be refined to reflect the dynamics of the markets you’re navigating more accurately. Your ability to interpret OBV can be strengthened by comparing it to other momentum indicators.

Comparative Analysis with OBV

Given that both OBV and RSI (Relative Strength Index) measure momentum in the market, the two indicators match up very well and can be used for simple yet powerful trade entries. In the chart below, we have an example of a sell trade using bearish On Balance Volume divergence in EURJPY. In the chart below, we can see an example of bullish divergence and a resulting long trade in AUDUSD.

On Balance Volume Trading Strategies

If the price breaks above resistance with a rising OBV, it signals that the breakout is likely to be valid because volume supports the price move. Watch for breaks in OBV trendlines—these can act as early signals of a price trend change. When the indicator aligns with price movements, it indicates that investors are participating in the trend.

While volume reflects market activity, OBV interprets it in the context of price movement, making it useful for identifying trends, divergences, and shifts in market sentiment. The On Balance Volume indicator (OBV) is used in technical analysis to measure buying and selling pressure. It is a cumulative indicator meaning that on days where price went up, that day’s volume is added to the cumulative OBV total. If price went down, then that day’s volume is subtracted from the OBV total.

Volume Precedes Price

The OBV reflects the collective buying and selling pressure crystallized through the volume trend. OBV is ideal on balance volume indicator for spotting trends and divergences, while VWAP is popular for intraday trading and identifying fair value. Accumulation/Distribution (A/D) and Chaikin Money Flow (CMF) help assess buying or selling pressure, with CMF offering momentum insights. Volume Oscillator and Relative Volume (RVOL) are great for confirming breakouts and gauging unusual activity. Intraday traders often prefer VWAP and RVOL, trend traders benefit from OBV or A/D, and breakout or momentum traders rely on CMF or Volume Oscillator.

OBV Trendlines

The best advice is to try some different indicators out and see which suit your trading style best and remember, combining volume indicators with other tools typically enhances reliability. On Balance Volume and VPT (Volume Price Trend) are both volume-based indicators but differ in their approach. OBV adds or subtracts daily volume based solely on whether the price closes higher or lower, creating a simple cumulative measure of buying or selling pressure. Volume can be classified as positive when the closing price increases from the previous close, implying accumulation. Negative volume occurs when the closing price decreases from the previous close, implying distribution.

Granville’s Market Predictions

This signals to us that price is likely to resolve lower out of the range, offering a selling opportunity as the market eventually breaks lower. As price breaks below support we see that OBV breaks below its moving average, giving us a bearish signal to place a sell trade. In the same way that we can apply moving averages to price, we can also apply them to the OBV indicator.

• These tools aim to predict future market movements by analyzing the velocity of price changes.
• Volume measures the raw trading activity of an asset, typically displayed as a histogram, without indicating direction.
• Therefore, closing prices should be considered when looking for divergences or support/resistance breaks.
• We then get a large bullish pin bar, giving us an entry signal to trade the following move higher.
• On Balance Volume (OBV) uses volume and price to measure buying and selling pressure.

OBV for Intraday Trading

Second, determine if the current trend matches the trend for the underlying security. Once broken, the trend for OBV will change and these breaks can be used to generate signals. Therefore, closing prices should be considered when looking for divergences or support/resistance breaks. Finally, volume spikes can sometimes throw off the indicator by causing a sharp move that will require a settling period.

After selecting, OBV can be positioned above, below or behind the price plot of the underlying security. Positioning it behind the plot makes it easy to compare OBV with the underlying security. Chartists can also add a moving average or another indicator to OBV by selecting Advanced options, which is to the right of the indicator position. On-balance volume and the accumulation/distribution line are similar in that they are both momentum indicators that use volume to predict the movement of “smart money”. In the case of on-balance volume, it is calculated by summing the volume on an up-day and subtracting the volume on a down-day.

The On Balance Volume indicator (OBV) is a good metric for measuring buying and selling pressure. Many people believe that buying and selling pressure precede changes in price, making this indicator valuable. Divergences especially, should always be be noted as a possible reversal in the current trend. As with most indicators however, it is best to use OBV with additional technical analysis tools. Divergence occurs when price movement is not confirmed by the indicator.

• The theory behind OBV is based on the distinction between smart money—namely, institutional investors—and less sophisticated retail investors.
• This strategy involves identifying divergence between the On Balance Volume indicator and price movements to anticipate potential trend reversals.
• On-balance volume (OBV) is a technical indicator that measures positive and negative volume flow and analyzes the trading direction.
• Volume can be classified as positive when the closing price increases from the previous close, implying accumulation.

The key volume component is the daily trading volume, the total count of shares traded during a day. When you observe high volume, it signifies a high level of interest in the stock. OBV begins rising, telling us that bullish pressure is building and shortly after we see OBV break above its moving average.

Traders and investors can use ADTV to assess liquidity, analyze volatility, optimize trade execution, and manage risk. ADTV can be used alongside OBV and other indicators to evaluate the market’s activity. Add a moving average line to the OBV to look for OBV line breakouts; you can confirm a breakout in the price if the OBV indicator makes a concurrent breakout. Conversely, the volume is subtracted from the OBV if the price closes lower.