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What is an On Balance Volume indicator and how to use it on bit4you described in this article.
In 1963, Joseph Granville, a famous trading theorist and practitioner, introduced the On Balance Volume trading indicator in his book “A New Stock Market Strategy”. Nowadays this indicator is still relevant and remains one of the most popular ones. In this article you will learn about the On Balance Volume indicator, how to use it, customize it, identify signals, open and close positions.
What is an On Balance Volume indicator (OBV)
The balance volume is the simplest, elementary technical indicator that characterises the dynamics of trading volume. Its peculiarity is that the indicator does not interact with the price, as always, indicators apply, but operates directly with the trading volume, using close-out prices indirectly only. The indicator has an accumulative effect and is used in technical analysis to estimate the pressure exerted by buyers (bulls) and sellers (bears) on the market. This indicator is one of the first indicators, evaluating positive or negative financial flow, connected with trading. Subsequently, analysts began to use it extensively, to get signals based on OBV and price divergence, as well as to confirm a trend.
How to use it on bit4you?
To understand how to apply this indicator you will need a trading platform. Let’s explore it on our bit4you trading platform. First, you need to choose the asset you are looking for and a price chart for the specific timeframe will appear. The OBV does not give unambiguous signals on its own, but only confirms the signals of other indicators. The quantitative value of OBV is not as important as its directionality. Graphically, the indicator looks like a curve displaying the change in accumulated amount as described above. So how should it be used? If you need to calculate the balance volume, the first thing to do is to check today’s closing price against yesterday’s closing price. Then you can add today’s volume to yesterday’s balance volume, assuming today’s close is higher than yesterday’s. However, otherwise, you will have to subtract today’s volume from yesterday’s. You can only change nothing if today’s closing price corresponds to yesterday’s. You can only change nothing if today’s closing price corresponds to yesterday’s.The graph clearly shows how the graph of balance volume corresponds exactly to the graph of price. If the balance sheet volume increases at the same time as the price, it indicates the strength of the trend to a large extent, as it shows that there is an intensive inflow of capital into the market of this particular instrument. In case you notice a divergence in the price and balance sheet volume movements, become more sceptical of the trend and wait for the indicator to move backwards. In other words, if the price goes up and the indicator goes down, wait for the price to fall and vice versa. However, you should understand that the absolute value of the indicator does not play a significant role. It is more important the direction of the balance volume.
The formula for On Balance Volume is quite simple. For example, if today’s closing price is higher than yesterday’s closing price, OBV is equal to the sum of previous OBV and volume for the period: OBV i = OBV i-1 + Volume i;
If today’s closing price is lower than yesterday’s closing price, OBV is equal to the difference of the previous OBV and volume for the period: OBV i = OBV i-1 – Volume i;
If yesterday’s and today’s closing prices are equal, OBV is equal to the previous OBV: OBV i = OBV i-1. Where: OBV i – Volume of the current period; OBV i-1 – Volume of the previous period; VOLUME i – Volume of the current candle.
However, the Balance Volume indicator (OBV) is a fairly simple but quite informative and handy tool that allows you to get a clearer picture of where the market is heading. The main advantage of the indicator for trading is its ability to generate lead signals that you can use when building trading systems in conjunction with other indicators. Among disadvantages it is worth noting that the indicator aims mainly at the stock market and in the process of trading it can give out a great number of erroneous signals. In addition, the Balance Volume (OBV) is useful as a tool, providing information for consideration, but not for making trades with it.