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How to Use Stock Volume to Improve Your Trading

on balance volume indicator

By definition, the On-Balance Volume ondicator is a momentum indicator that relies on volume flow to measure momentum. Analysts can use the indicator to predict large fluctuations in an asset’s price, by spotting anomalies in the OBV indicator that doesn’t match the price action. Like many other indicators which can give you wrong signals in lower time frames, OBV could mislead you in trading decisions too. Therefore, it’s better to not use OBV indicator in lower time frames or confirm its signal with other indicators before opening a position. Therefore, if volume or a volume proxy indicator is increasing while the response in price is more muted, some traders may take notice of this divergence as a clue that price may soon follow. Similarly, when price is moving but volume is low, traders may take this as an indication that the market may be ready to consolidate.

on balance volume indicator

It does so by taking the delta values for all bars and combining them together to create a graph. The indicator is useful when the trader tries to identify the buying and selling pressure at different price levels (i.e., swing highs and lows). However, the value readings of this indicator are optional as they change based on the reference start period.

On-Balance Volume is an excellent way of gauging where the smart money is positioned. Comparing volume today to volume 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant they are likely to be. A trend accompanied by an OBV line with a steeper slope indicates it is growing stronger, and new market participants are looking to enter the market. Should you spot such situations, it is an indication that there might be opportunities to buy/sell against incorrect prevailing trends.

Trading volume is a measure of how much a given financial asset has traded in a period of time. For stocks, volume is measured in the number of shares traded. For futures and options, volume is based on how many contracts have changed hands.

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It can indicate whether the price of the instrument you’re trading is about to reverse or continue the trend. For your convenience, you can also change the position where the OBV box appears on your chart to make for better management of your trading workspace. As you can see, because on day five, the price didn’t change, the OBV remains equal to the previous one. OBV(i) – is the indicator value of the current period;

OBV(i-1) – is the indicator value of the previous period;

VOLUME(i) – is the volume of the current bar.

on balance volume indicator

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The Difference Between On-Balance Volume and Other Indicators

Earlier we mentioned that traders use the OBV indicator to spot institutional and small investors’ presence. Now let’s get practical and see how you can capitalize on it. The indicator was introduced by Joseph Granville back in 1963.

Look for when the OBV crosses below the 20 EMA and confirm if your price action breaks out of the upper Bollinger and closes back in. We put all of the tools available to traders to the test and give you first-hand experience in stock trading you won’t find elsewhere. What we really care about is helping you, and seeing you succeed as a trader. We want the everyday person to get the kind of training in the stock market we would have wanted when we started out. Our watch lists and alert signals are great for your trading education and learning experience.

  • When price broke the uptrend line with a corresponding double top fail on the OBV the short really worked.
  • On the green candle highlighted below, the candle closed much higher than the previous candle close while the OBV signaled a very small volume gain.
  • Little change in volume or declining volume on a breakout indicates a lack of interest and a higher probability for a false breakout.
  • Since volume and price trends and highly correlated, the OBV indicator can help traders know when is the right to enter or exit a position.
  • Now let’s get practical and see how you can capitalize on it.

First, let’s start by saying that the OBV indicator is a cumulative indicator. This means whenever there is a change in the instrument’s price, the volume is adjusted in the cumulative OBV total. The concept for the indicator https://bigbostrade.com/ is based on the idea that when there is an increase in trading volume, even if it doesn’t affect the price at first, at some point, it will. The price will then go up or down, depending on what types of orders prevail.

How Do You Use OBV for Trend Confirmation?

Always consider using the OBV indicator with other technical indicators, as it may serve poorly due to some limitations. Also, we provide you with free options courses that teach you how to implement our trades as well. Market breadth indicators are an excellent metric to use to gauge the relative stock performance between stocks that are advancing and stocks that are declining. That means you have to spend the time and put in the effort to learn chart patterns.

  • The most basic way to capitalize on these situations is by selling when you see the volume going down, without being followed by an immediate price drop.
  • In these situations, you can’t figure out whether buyers/sellers can maintain their control over price after reaching new levels or they just lost control.
  • Indicators are not required, but they can aid in the trading decision process.
  • It is important to note that between 74-89% of retail investors lose money when trading CFDs.

The OBV is a study that was developed to point out when divergence occurred between price action and volume. Granville suggested in his book that moves in volume come before moves in price. The On Balance Volume is quite functional for identifying new trends to get in early enough and detecting trend reversals when buying and selling pressure decreases. However, combining the indicator with other indicators that help filter out false signals proves more effective. Indeed, the OBV is characterized by certain benefits and limitations, as obtainable in many other indicators. Each day our team does live streaming where we focus on real-time group mentoring, coaching, and stock training.

In this guide, we will get to the core of the OBV indicator by focusing on how to use it, its pros and cons, and how it compares to other indicators. By adding and subtracting the relative performance of volume for a period to or from its previous volume, the indicator draws up a chart that often rises and falls with price action. This chart provides insights into the strengths of trends and the sustainability of the trends, helping traders predict future price movements. Because the OBV indicator is considered a leading indicator, it can lead to false signals.

Now let us consider the following steps to use the On Balance Volume with an Exponential Moving Average of 20. The Bullish Bears team focuses on keeping things as simple as possible in our online trading courses and chat rooms. We provide our members with courses of all different trading levels and topics.

In this example, OBV can be seen signaling not one but two bearish divergences. A trader would open a short position when price touches the bearish resistance line. More advanced forex sentiment analysis strategies include combining the indicator with trend lines or moving averages either to get an early position or take a safer, late position with a confirmation signal.

On-Balance Volume Calculation

Analysts look to volume numbers on the OBV to track large, institutional investors. For example, institutional money may drive up the price of an asset, then sell after other investors jump on the bandwagon. The OBV Heikin Ashi indicator is a modified version of the On-Balance Volume indicator that incorporates the Heikin Ashi transformation. This technical tool aims to provide traders with a smoother representation of volume dynamics and price trends. The OBV Heikin Ashi indicator combines the principles of OBV and Heikin Ashi to offer insights into the volume and… OBV was originally developed by Joe Granville, and he first explained it in his 1963 book Granville’s New Key to Stock Market Profits.


In other words, someone could take a long position at this price level and with a tight stop loss, the trade would be profitable. In an uptrend, divergence happens when price mark a higher high but OBV indicates a lower high. Accordingly, in a downtrend divergence occurs when price mark a lower low but OBV indicates a higher low. Tuned is not a broker-dealer, exchange, custodian, wallet provider, or counterparty.

Gauge Trend Strength and Continuation With Rising OBV

Our content is packed with the essential knowledge that’s needed to help you to become a successful trader. On our site, you will find thousands of dollars worth of free online trading courses, tutorials, and reviews. If you’ve looked for trading education elsewhere then you’ll notice that it can be very costly. In other words, a stock going up in price is more likely to keep going up. As a result, you can protect your profits and keep your losses to a minimum. A man by the name of Joseph Granville invented the OBV in the sixties.

On-Balance Volume does have its disadvantages working as a leading indicator. These guidelines do not hold true in all situations, but they offer general guidance for trading decisions. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. Take your learning and productivity to the next level with our Premium Templates.

Waiting for a break in the sequence of highs or lows will signal the trend is about to end. In the sample provided, a series of higher highs and higher lows after a low is put in suggest the uptrend is strong, and until a lower high or lower low is put in, the trend will remain in tact. The content on this website is provided for informational purposes only and is not intended to constitute professional financial advice. Trading any financial instrument involves a significant risk of loss.

Although not advisable, some prefer trading just combining the price trend and the OBV indicator. This can prove an easy-to-apply and relatively sound strategy when looking for breakouts. To provide further confirmation, the original developer of the OBV indicator and most of the traders applying it suggest combining it with a 20-period MA. These discrepancies between the price and the volume can help you forecast upcoming trend reversals. When the OBV hits a lower high, it means the bulls are getting weaker, indicating growing selling pressure.

In the case of accumulation/distribution, the formula takes the position of the current price relative to its most recent trading range and multiplies it by the volume for the particular period. When the price is making higher highs, but the OBV marks lower highs, there is a good chance you will see a price reversal. However, it isn’t advisable to trade such signals right away.

The on-balance volume is worth using today if you apply it together with other indicators. That way, it can help better identify trend reversals, confirmations, or divergences, thus complementing your trading strategy. On balance volume is a very simple indicator with very powerful signals but finding those signals can take some time.

When the OBV line rises, it suggests that buying pressure is increasing, and the price will likely continue to rise. Conversely, when the OBV line is falling, it suggests that selling pressure is increasing, and the price is likely to continue to fall. In the chart below, we can see an example of a bullish divergence that signalled upward price moves even as the market’s dominant trend direction appeared to be in decline. On-Balance Volume works as a cumulative indicator which measures differences between buying pressures and selling pressures over a specific period. Granville’s investment strategies initially operated on the assumption that trading volume is what works as the key driver of significant price trends.

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