Technical analysis on the other hand is much simple because it involves using tools such as moving averages, relative strength index, and stochastic oscillator to predict the future prices. The On Balance Volume (OBV) line is simply a running total of positive and negative volume. A period’s volume is positive when the close is above the prior close and is negative when the close is below the prior close. Thus, with a little practice, the signals it provides can be easy to spot and take action on. For example, in the chart below, buying and selling signals emerged when the on-balance volume made a crossover with the moving average. On Balance Volume is calculated by adding the day’s volume to a cumulative total when the security’s price closes up, and subtracting the day’s volume when the security’s price closes down.
It was one of the first indicators to measure positive and negative volume flow. Chartists can look for divergences between OBV and price to predict price movements or use OBV to confirm price trends. Chartists should instead focus on the characteristics of the OBV line. Second, determine if the current trend matches the trend for the underlying security.
The Best On-Balance Volume Indicator Trading Strategies
The OBV indicator is called the “smart money” indicator because it can tip a trader off as to larger players taking early positions in markets, ahead of major trend changes or breakouts. These moves can be spotted on the OBV indicator, sometimes days before they occur. When price finally breaches a trendline, a trader will take it as confirmation of the OBV signal, and enter a trade based on the direction of the breakout.
At that point, larger investors begin to sell, and smaller investors begin buying. When assets are trading with a tight range, OBV rising could signal accumulation while OBV falling could signal distribution taking place before a move lower. When both price and OBV are making higher highs and higher lows, the asset is in an uptrend that is likely to continue for the foreseeable future. You need to know that OBV works well when it is used in combination with other indicators. These indicators could be the likes of moving averages and relative strength index.
The chart for Medtronic (MDT) shows a bearish divergence with volume leading price lower. Also, notice that OBV broke support during this divergence period. The uptrend in OBV reversed with the break below the February low. Volume ultimately won the day as MDT followed volume lower with a decline into the low 30s.
- 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.
- This number is now used as the volume multiplier to compute positive or negative volume.
- In other words, a bullish divergence forms when the OBV is rising while the stock is falling.
- These signals are truly based on the theory that volume precedes prices.
- It is often called the “smart money indicator” because it reveals the actions of large players in the financial markets before the general public becomes aware of them.
Chartists can use OBV to confirm the underlying trend or look for divergences that may foreshadow a price change. As with all indicators, it is important to use OBV in conjunction with other aspects of technical analysis. OBV can be combined with basic pattern analysis or to confirm signals from momentum oscillators. On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator, adding volume on up days and subtracting it on down days. OBV was developed by Joe Granville and introduced in his 1963 book Granville’s New Key to Stock Market Profits.
Example of How to Use On-Balance Volume
As the name suggests, On Balance Volume is a volume-based indicator. Volume indicators use the concept of volumes to help traders make better decisions. In this case, OBV is confirming the strength of the underlying trend, be it down or up. The chart for Autozone (AZO) shows prices as a black line and OBV as a pink line. Both moved steadily higher from November 2009 until October 2010.
- Granville believed that volume was the key force behind markets and designed OBV to project when major moves in the markets would occur based on volume changes.
- At the same time, a rising OBV is an indication of positive volume pressure that can lead to higher prices.
- It was one of the first indicators to measure positive and negative volume flow.
- A trader would open a short position when price touches the bearish resistance line.
- In this article, we will look at On Balance Volume, which is not well-known by traders.
The second chart shows OBV moving higher as Texas Instruments (TXN) trades within a range. Rising OBV during a trading range indicates accumulation, which is bullish. On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days.
How to use Level 2 Data to Trade at a Higher Tier!
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. The On-Balance-Volume (OBV) is an important technical indicator in the market, although not suitable for day traders. It appears as a single line that tends not to tell a lot about a financial asset. However, when used well, it can help you identify where to buy or sell an asset. OBV and AD have a close resemblance as you can see in the chart below. However, the two have a major difference because accumulation and distribution measures the cumulative flow of money into and out of a security.
A good example of the OBV indicator at work is shown in the chart below, As you can see, the overall trend of the Apple stock price is upwards as long as the OBV indicator is rising. The uptrend starts fading as the OBV indicator starts moving sideways. At the same time, a rising OBV is an indication of positive volume pressure that can lead to higher prices. On Balance Volume (OBV) is available in SharpCharts as an indicator.