On Balance Volume (OBV)
Definition of ‘On Balance Volume (OBV)’ - On-balance volume (OBV) is a technical indicator of momentum, using volume changes to make price predictions.It does this by looking at the volume changes.
What Is On-Balance Volume (OBV)?
On balance volume (OBV) Definition - a technical indicator used by traders to measure the momentum of a security.
It does this by looking at the volume changes and making price predictions, based on that information. When the security closes higher than the previous close, all of the day's volume is considered up-volume.
When it closes lower than the previous close, all of the day's volume is considered down-volume. This information can be used to predict future price movements. OBV is one of the most popular momentum indicators and it's used by traders to identify overbought and oversold conditions.
The indicator has been around since the 1950s, but it wasn't until the late 1970s that people started using it to trade stocks. OBV is calculated by adding up all of the volumes for up-days and subtracting the total volume for down-days:
On-Balance Volume = (Up-Volume + Down-Volume) / (High-Volume - Low-Volume)
There are several variations of On-Balance Volume, including cumulative On-Balance Volume (OBVC), which considers past volume changes to make predictions about future price movements.
On-balance volume is one of many indicators that technical analysts use to trade securities. Using on-balance volume can be a great way to get an edge in the market.
By understanding how this indicator works, you can make better trading decisions and hopefully, profit from them.
Some traders also use OBV to predict short-term price movements in commodities and currencies. It is less commonly used for these markets, but there is some evidence that it can be effective. OBV is a versatile tool that has been shown to be helpful in many different market conditions.
It's important to remember, however, that no indicator works all the time and should only be used as part of a larger trading strategy. However, on-balance volume can be a powerful tool when used correctly, so it's definitely worth learning more about!
How Do You Trade With OBV?
There are a few ways to trade with on-balance volume. One way is to look for divergences between the security's price and OBV. When the price is moving in one direction, but OBV is not, this could be a sign that the momentum is about to change.
You can also use OBV to confirm trends. If OBV is trending up, while the security's price is trending down, it could be an indication that the trend will reverse soon.
Additionally, you can use OBV as a filter for entry and exit points. If you're looking to buy a security, wait for OBV to turn bullish before entering into a long position.
Also, if you're looking to sell, wait for OBV to turn bearish before exiting your short position.
How reliable is OBV?
OBV is a momentum indicator and as such, it can be used to predict price changes. However, OBV should not be used in isolation; it should be combined with other technical analysis tools for more reliable predictions. Furthermore, OBV should not be used to buy or sell decisions; rather, it can be used to indicate when the market is becoming more or less bullish/bearish. As always, investors should use caution when trading, based on any indicator signals.
What is OBV divergence?
OBV divergence is when the OBV indicator and price chart move in opposite directions. This generally signals a reversal in the security’s price trend. On-balance volume divergence can be used to confirm or refute other technical indicators and patterns. For example, if you see a bullish engulfing pattern form on your chart, using OBV divergence can help you determine whether or not the pattern is likely to be successful. If the OBV indicator is moving higher while prices are falling, this would suggest that the bulls are losing steam and a reversal could be around the corner. Conversely, if prices are rising while the OBV indicator is dropping, it could be an early sign of strong buying pressure, pushing prices even higher. By watching OBV divergence, you can better understand when and where a security's price is likely to change direction.
What is the difference between OBV and other momentum indicators?
There are many different types of momentum indicators, but one of the key differences between OBV and some of the others is that OBV takes volume into account. This makes it a bit more reliable than some other indicators, which may not be as sensitive to changes in volume.
Can I use OBV to trade forex or commodities?
OBV has been shown to be effective in predicting price movements in stocks, so it's likely that it would also be effective in other markets, such as forex and commodities. However, there is no definitive proof that this is the case - further research is needed. On-balance volume can definitely be used effectively when trading stocks; whether or not it can be used in other markets is still up for debate.