On-Balance Volume (OBV) is a popular technical indicator used in the technical analysis developed by Joseph Granville in 1963. It is an indicator used to measure the relative strength of buying and selling pressure in a market by calculating the cumulative volume flow. The OBV indicator helps investors make better trading decisions by giving them an idea of the intensity of buying and selling in the market.
Table of Contents
What is on Balance Volume Indicator
The on-Balance Volume indicator (OBV) is a line chart that measures security’s positive and negative volume flow. It accumulates volume on up days and subtracts volume on down days. It is used to show the relationship between a security’s volume and price movements.
History
Joseph Granville developed On-Balance Volume Indicator (OBV) in 1963. He first introduced the concept in his book “New Key to Stock Market Profits”. Since then, the OBV indicator has been used by many traders and investors as a tool to make better trading decisions.
Advantages & Disadvantages
The main advantage of using the On-Balance Volume (OBV) indicator is that it accurately gauges the intensity of buying and selling pressure in the market. This helps investors make better trading decisions based on the direction of the volume flow. The main disadvantage of using the OBV indicator is that it does not consider a security’s price movements.
Calculation of On-Balance Volume
The On-Balance Volume (OBV) indicator is calculated by subtracting the prior period’s closing volume from the current period’s closing volume. If the current period’s closing volume is greater than the prior period’s closing volume, then the current period’s OBV is calculated by adding the current period’s closing volume to the prior period’s OBV. If the current period’s closing volume is less than the prior period’s closing volume, then the current period’s OBV is calculated by subtracting the current period’s closing volume from the prior period’s OBV.
Trading with On-Balance Volume
Identifying Divergences
The On-Balance Volume (OBV) indicator can be used to identify divergences between the price and the volume flow in securities. When the price and the volume flow diverge, it suggests that the market is about to make a reversal.
Momentum Trading
The On-Balance Volume (OBV) indicator can also be used for momentum trading. When the OBV line is trending higher, it suggests that buying momentum is increasing and that the price is likely to move higher. Conversely, when the OBV line is trending lower, selling momentum is rising, and the price is likely to move lower.
Conclusion
The On-Balance Volume (OBV) indicator is a technical indicator used to measure the relative strength of market buying and selling pressure. It is calculated by subtracting the prior period’s closing volume from the current period’s closing volume. The OBV line is a line chart that plots the cumulative total of the volume flow in security. The OBV indicator can be used to identify divergences, momentum trading and channel breakouts.
On Balance Volume is a reliable Indicator to predict future price movements. But it is recommended to use this indicator in a broader trading system with other Technical tools and indicators.
