The On Balance Volume (OBV) Indicator was developed in the 1960s by Joseph Granville. It measures buying and selling pressure by estimating the impact of trading volume on price movements. This is achieved through cumulative total volume, comparing price levels and volume.
OBV Indicator Explained
- OBV stands for On Balance Volume.
- The indicator measures market buying and selling pressure.
- It analyzes the volume of a market.
Key Features of OBV
- Cumulative Volume: Adds volume on up days, subtracts on down days.
- Trend Confirmation: Aligns with price trends but divergences signal potential reversals.
- No Absolute Value: The OBV value itself is relative; direction matters more.
What Is On Balance Volume (OBV)?
The market is influenced by numerous factors, with volume being one of the most critical. The Dow Theory posits that volume confirms trends:
- Rising volume supports trend continuation.
- Declining volume suggests trend weakening.
Granville’s OBV adapts this principle to quantify volume’s role in price movements.
How OBV Works
- Up Days: Volume added to cumulative OBV.
- Down Days: Volume subtracted.
- Divergences: Mismatches between OBV and price indicate potential reversals.
Example:
- If prices hit new highs but OBV flattens, weakening bullish momentum may follow.
Pros and Cons of OBV in Trading
Advantages
- Reliable signals for Forex and equities.
- Effective for trend confirmation.
Disadvantages
- Requires complementary indicators (e.g., Moving Averages).
- Complex for beginners.
| Pros | Cons |
|---|---|
| High accuracy in trend analysis | Lacks standalone utility |
| Works across multiple markets | Steeper learning curve |
Trading Strategies with OBV
1. Trend and Trendlines
- OBV Rising: Confirms uptrend.
- OBV Falling: Validates downtrend.
- Use with MA: Crossovers highlight entry/exit points.
2. Trend Reversal and Divergence
- Bullish Divergence: Higher OBV low + Lower price low = Potential rally.
- Bearish Divergence: Lower OBV high + Higher price high = Possible drop.
Tip: Combine with support/resistance levels for higher accuracy.
3. Trend Following
- Tools: Bollinger Bands (50-period), EMA (20-period).
- Signal: OBV breaks EMA, confirmed by pivot levels.
Example:
- Long Entry: Price exits lower Bollinger Band, OBV crosses EMA upward.
- Stop Loss: 5 pips below recent low.
FAQs
What Does OBV Indicate?
OBV reflects cumulative buying/selling pressure, signaling trend strength or reversals.
What Are Other Volume Indicators?
- A/D Line
- VPT
- MFI
- CMF
Best Indicators to Pair with OBV?
- Moving Averages
- RSI
- Bollinger Bands
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Conclusion
OBV is a powerful tool for forex and stock trading, but it must be combined with other indicators (e.g., MAs, RSI). Ideal for experienced traders due to its nuanced interpretation.
Final Tip: Always backtest strategies in a demo account before live trading.