What Is On-Balance Volume and Why Is It Essential to Cryptocurrency Trading?

on-balance volume

Traders may also use additional technical indicators or price action analysis to further confirm a breakout signal and to determine entry and exit points for their trades. For example, traders may look for a breakout in combination with a bullish chart pattern, such as a cup and handle, to further confirm a bullish breakout signal. In the OBV divergence strategy, traders look for discrepancies or divergences between the price of an asset and its OBV indicator. Specifically, traders look for situations where the price of an asset is making higher highs or lower lows, while the OBV indicator is making lower highs or higher lows. This type of divergence suggests that the momentum behind the price movement is weakening, and that a potential reversal in trend may be forthcoming. Experts recommend interpreting the OBV changes together with the price chart moves.

  • 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.
  • Thus, with a little practice, the signals it provides can be easy to spot and take action on.
  • OBV, on the other
    hand, held above its June low to form a bullish divergence.
  • The On Balance Volume is a leading indicator that measures the volume changes to make daily volume price predictions and recognize incorrect prevailing trends.

In contrast, when the prices close at a lower value, all of that day’s volume is considered down-volume. Balance Volume is included in the list of the MetaTrader 4 standard indicators. Therefore, it can be considered the leading classical tool of technical analysis. However, its readings are not so accurate as to conduct effective trading only with this tool alone.

What is the On-Balance Volume Indicator (OBV)?

As you see from the above chart, the IBM price goes down after we enter a short. The principle of spotting false breakouts is based on trend confirmation techniques. A strong trend is always accompanied by the OBV line moving in the same direction.

What is another name for on-balance volume?

The technique, originally called ‘continuous volume’ by Woods and Vignola, was later named ‘on-balance volume’ by Joseph Granville who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits.

When the OBV diverges from the direction of a security’s price movement, it may be an early indicator of a pending trend change. On-balance volume (OBV) adds volume on up days while subtracting volume on down days to measure trading pressures. For a particular security, when its price closes at a higher value than the previous day’s, that day’s volume is the up-volume.

Combine With Other Indicators

This method of analyzing On Balance Volume is designed for trading short-term cycles. According to Granville, investors must act quickly and decisively if they wish to profit from short-term OBV analysis. Once a trend is established, it remains in force until it is broken. The first occurs when the trend changes from a rising trend to a falling trend, or from a falling trend to a rising trend. The On Balance Volume doesn’t consider the strength of the price move. For example, the signals are not distorted by the new releases.

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To trade the MA and OBV forex strategy, you need to add two exponential moving averages with periods 34 and 12. Such a type of divergence is quite common in the minutes’ charts, where the trade volume in a short period is important. A stop loss is set according to the common principle, a little higher than the local high (red line in the chart).

How the On-Balance Volume Indicator Works

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. As mentioned before, the value of the on-balance volume is not important. However, its rate and direction are indicators of a noticeable change. OBV was first mentioned in 1963 by Joseph Granville in his book called ‘Granville’s New Key to Stock Market Profits’. Granville considered volume to be a key force behind market changes.

It is not convenient to calculate On Balance Volume manually. To make the OBV formula as clear as possible, I prepared a calculation model in Excel. https://forexhero.info/page/2/ Keep in mind that trading with margin may be subject to taxation. Try a free demo account today, or register for a free trading account.

What is an example of volume in forex?

For example, if bitcoin jumps 20% in one trading day after being in a long downtrend. If the volume is high during the day relative to the average daily volume, it is a sign that it is reversing its trend.