On-Balance Volume: The Way To Smart Money

If you see a flat zone that looks like a potential bart, track it on a… Multi Asset Performance indicator (also called “Spaghetti”) makes it easy to monitor the changes in Price, Open Interest, and On Balance Volume… Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice.

• Technical analysts use On-Balance Volume as a way to identify price divergences or to confirm an emerging trend in asset valuations.
• Although not advisable, some prefer trading just combining the price trend and the OBV indicator.
• On-Balance Volume can also be used to determine the strength of a trend, and if that trend is likely to continue or not.
• The numerical lines for each day are updated in real-time as the OBV high and low values change.
• When the OBV line rises, it suggests that buying pressure is increasing, and the price will likely continue to rise.

Volume ultimately won the day as MDT followed volume lower with a decline into the low 30s. The second chart shows Valero Energy (VLO) with OBV forming a bearish divergence in April and a confirming support break in May. Bullish and bearish divergence signals can be used to anticipate a trend reversal. These signals are truly based on the theory that volume precedes prices.

On-Balance Volume (OBV) Indicator – Trading Strategy and Tips

Granville noted that the on balance volume study would often move before prices. The indicator’s creator was convinced by the theory that volume precedes price, and created the OBV indicator to signal when volume makes a large jump without moving the price of an asset. This signals that institutional investors and other “smart money” are taking positions ahead of a major crowd sentiment change. OBV can be used in any kind of system – trend following/momentum or price reversal.

Finally, they complement it with a tight stop loss (above/below the most recent swing). Calculating the OBV is, in fact, very easy if you know how to deal with the relationship between the closing prices of two consecutive trading days. The OBV is displayed as a blue line at the bottom of the chart.

And this is when institutional investors start reaping profits by selling to the retail investors who had just joined the bandwagon. Essentially, the OBV indicator seeks to quantify the cumulative buying and selling pressure behind an asset based on its volume changes. You may even hear other traders say you don’t need any technical analysis.

On Balance Volume Indicator with Moving Average

Each indicator uses a slightly different formula, and traders should find the indicator that works best for their particular market approach. Although the price appears to be healthy and range-bound, it appears as if long term holders have liquidated their positions and now are waiting for prices to fall dramatically. I know it looks like I’m kicking PCLN when it’s down, but it is still just “rolling over” on the long term chart. Barts (AKA bull or bear traps) are a common pattern in cryptos. The OBV indicator can be useful for detecting Wyckoff style accumulation or distribution. It’s especially useful for Barts which have a very flat section of price action which makes the OBV divergence very apparent in some cases.

This can help confirm other technical indicators and analysis techniques. While he only applied his new volume indicator to the analysis of stocks, it has since been used by traders in other financial trading markets, such as commodity futures and forex trading. The Relative Strength Volume Comparison is a powerful tool that can help traders identify the current trend based on volume pressure and potential reversals. This oscillator is made of two lines and the overbought and oversold levels. Each of these two lines is a relative-strength formula that contains both the famous RSI and CCI formulas, smoothed by a Hull… Technical analysis focuses on market action — specifically, volume and price.

OBV can help traders almost easily to distinguish between a fake breakout or a real breakout. When changes in price and volume have a positive correlation, we can simply confirm a trend. In other words, if the closing price of the bitcoin doesn’t change in one day, The rolls-royce stock prediction 2025 OBV going to show last day volume amount. OBV is an indicator which can help you to understand whether bulls are buying or bears are selling. Many traders who use OBV will be less interested in its value but rather its rate of change to help generate trade ideas.

Trading Examples Using On-Balance Volume

Lower volume indicates that traders do not have much conviction in the pullback, and it may suggest that the market’s upward trend could continue, making the pullback a buying opportunity. When closing prices are in the upper portion of the day’s range, and volume is expanding, values will be high. When closing prices are in the lower portion of the range, values will be negative. Chaikin Money Flow can be used as a short-term indicator because it oscillates, but it is more commonly used for seeing divergence. At a market bottom, falling prices eventually force out large numbers of traders, resulting in volatility and increased volume.

The idea is to pull up a moving average unto the Indicators charts to obtain signals when there is a cross-over between them. For instance, if we pull up a 20 EMA onto the OBV chart, then a cross of the OBV above the EMA indicates a buy signal, and a cross of the OBV below the EMA signifies a sell. We have a basic stock trading course, swing trading course, 2 day trading courses, 2 options courses, 2 candlesticks courses, and broker courses to help you get started.

• Notice how BBY broke its downtrend line in late February and OBV confirmed with a resistance breakout in March.
• Being the best trader you can be should be the ultimate goal.
• For matters of simplicity, I’ve added just a 50-period simple moving average to the price chart.

Volume builds and once the buyers start outbidding the sellers, price will eventually follow. As price rises, retail traders are likely to start buying believing its new uptrend suggests that it might be a good investment (rather than the fact that it’s typically getting more expensive). At this point, institutional traders may begin selling to lock in profits. The OBV line is considered to be a leading indicator, meaning it can provide information on future price movements. When the OBV line diverges from the price trend, it can signal a potential trend reversal.

Trading On Balance Volume (OBV)

By putting these trading strategies into regular practice and using up to 1000x leverage, PrimeXBT can help a trader to grow their profits and minimize risk. There are various strategies on how to use the OBV, making it a very versatile tool for traders to create a winning system with. In this example, bitcoin price ranged in two recognisable levels and OBV indicated price break out right before the price went higher.

The same is true for options traders, as trading volume is an indicator of an option’s current interest. In fact, volume plays an important role in technical analysis and features prominently among some key technical indicators. On-balance volume (OBV) is a technical indicator that measures positive and negative volume flow and analyzes the trading direction. It shows as a single line that can provide insights into the intent of market players that investors can use to make trading decisions and identify where to buy or sell an asset. However, OBV doesn’t provide specific information about the financial asset, which can lead to misinterpretations. Therefore, traders should balance OBV by using lagging indicators.

Here is an example of trend lines showing divergence between the OBV and price action. Let us consider a step-by-step procedure for trading financial assets with the On Balance Volume. In this example, we look at a strategy of trading the OBV with a moving average.

The OBV indicator can also be seen oscillating around the zero line. While price action showed indecision and crosses above the moving average before crossing back below the average and moving lower. The OBV would keep a trader out of this trade, perhaps avoiding the price crossover signal. HowToTrade.com takes no responsibility for loss incurred as a result of the content provided inside our Trading Room. By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets.

On up days, volume (e.g., share count) is added to the indicator. On balance volume is used to determine when the “smart” money and “not-so-smart” money may be most active. The OBV works by keeping a running tally on volume in accordance with the direction of a security. When the security increases in price, volume is added to the running total making up the OBV figure. When the security decreases in price, volume is subtracted from the running total making up the OBV figure. Traders should be aware of these limitations and use the OBV in combination with other indicators and analysis techniques that are better suited to the market conditions they are trading.

Instead, traders often look for the direction of the indicator’s trendlines. The relationship that the indicator forms between price movement and volume is crucial for understanding market sentiment. With these, market concepts such as price trend continuation, trend reversals, and divergence become observable. For traders who want to stay with the trend, one could use the OBV in conjunction with a trend following system. For matters of simplicity, I’ve added just a 50-period simple moving average to the price chart.

Market makers and high-speed traders can often inflate the volume numbers by generating fake orders and canceling them right before execution. A massive spike in trading volume can throw the indicator off for a while. If you rely solely on it, it may deceive you into rushing your trading https://bigbostrade.com/ decision because of a false trend. Everything from the calculation to the way it is plotted and the signals it generates can be learned in a matter of few trading sessions. Of course, you will have to master it over time to better distinguish institutional from the retail volume.