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On Balance Volume indicator – Top 3 OBV Strategies

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What is OBV indicator?

On Balance Volume (OBV) is a cumulative indicator for measuring volume flow.

OBV is an indicator which can help you to understand whether bulls are buying or bears are selling. Simply it’s showing you buying or selling pressure.

You can measure the volume of any candle with a simple volume indicator on your charts. but, the OBV indicator helps you to see the volume trend better and moreover, To know when “smart money” comes to play.

This indicator first introduced by Joe Granville on his 1963 book “New Key to Stock Market Profits.”

How does OBV indicator work?

On Balance Volume (OBV) is a cumulative indicator that adds volume on green candles and subtracts volume on red candles. Here we show how OBV works with a simple example:

  • Day 1 closing price of bitcoin = $6500.00; volume = 1,315,000
  • Day 2 closing price of bitcoin = $6550.00; volume = 1,370,000
  • Day 3 closing price of bitcoin = $6420.00; volume = 1,210,000
  • Day 4 closing price of bitcoin = $6420.00; volume = 1,105,000
  • Day 5 closing price of bitcoin = $6570.00; volume = 1,360,000
  • Day 6 closing price of bitcoin = $6650.00; volume = 1,430,000

The idea behind the OBV indicator is:

whenever the daily price of the bitcoin goes up, Then OBV increases by the bitcoin volume amount accordingly.

In contrast, whenever the daily price of the bitcoin goes down, OBV decreases by the bitcoin volume amount.

In other words, if the closing price of the bitcoin doesn’t change in one day, The OBV going to show last day volume amount.

  • Day 1: OBV = 0
  • Day 2: OBV = 0 + 1,370,000
  • Day 3: OBV = 1,370,000 – 1,210,000 = 160,000
  • Day 4: OBV = 160,000
  • Day 5: OBV = 160,000 + 1,360,000 = 1,520,000
  • Day 6: OBV = 1,520,000 + 1,430,000 = 2,950,000

You can easily learn the OBV indicator formula from below image:

OBV indicator formula
OBV indicator formula

How to trade OBV indicator – Best strategies

There are 3 main strategies to use the On Balance Volume indicator in trading.

  1. When the price chart had a clear uptrend or downtrend, you can use OBV indicator to confirm the trend continuation.
  2. When the price trend and the OBV trend had opposite directions, then you can expect a price reversal.
  3. Finally, If the price was moving in a specific range you can confirm the breakout earlier with help of the OBV indicator.

On Balance Volume (OBV) Confirmation

On Balance Volume (OBV) indicator can help you to identify a price trend.

When changes in price and volume have a positive correlation, we can simply confirm a trend.

In this situation, increasing in volume would cause the price to go higher, and volume decreasing could cause the price to go lower.

OBV indicator Confirmation in Stock charts

When the price of an asset class like shares of a company are rising, you can confirm the continuation of the trend with OBV indicator. In this example, we looked at Facebook company share uptrend and how OBV indicator confirmed the uptrend with its increasing.

OBV indicator Confirmation in bitcoin and cryptocurrency charts

In this example, we demonstrated how OBV confirmed the bitcoin price movement. As its obvious in the image, when volume flow is incremental price followed it and caused the bitcoin price to mark a new ATH (all-time high).

On Balance Volume (OBV) divergence

OBV can help traders to understand whether the price is going to reverse or continue on its trend.

In an uptrend, divergence happens when price mark a higher high but OBV indicates a lower high. Accordingly, in a downtrend divergence occurs when price mark a lower low but OBV indicates a higher low.

OBV indicator divergence in stock charts

When you first look at the price of Apple shares you think we have a higher high so it seems the uptrend would continue. But, if you pay attention to OBV indicator, you realize the volume flow turned downside, and OBV showed a lower high which means bulls lost their power and as we go further the selling pressure is increasing.

OBV indicator divergence in bitcoin and cryptocurrency charts

When the price of any asset reaches to its support/resistance levels, Then price reacts strongly to it.

In this example, bitcoin price reached a critical resistance level, and as it went higher, OBV indicated lower volume. In fac, OBV clearly showed the price reversal of bitcoin before the price fell. in other words when the price went higher bulls lost their power and bears took control of the price.

On Balance Volume (OBV) breakout

These days breakout trading is not as easy as it was before, and many traders caught up in bull/bear traps. OBV can help traders almost easily to distinguish between a fake breakout or a real breakout.

  • If the price is going to break a resistance level, then it should have an incremental volume.
  • If the price is going to break a support level, then it should lose its current volume.

OBV indicator breakout in stock charts

In this example Tesla shares ranging on a specific price level with a clear support area. If you consider the volume flow of this area you realize the OBV confirmed price breakout to downside even before the price fell.

This is one of the advantages of on balance volume indicator. Sometimes it can show the signal of a price breakout before it happens. In this case, bears took control of price and increased the selling pressure which caused the price to break down.

OBV indicator breakout in bitcoin and cryptocurrency charts

Bitcoin and other cryptocurrencies price movements are very different from other asset classes. Sometimes bitcoin price is ranging too long which cause traders to lose their concentration.

In this example, bitcoin price ranged in two recognisable levels and OBV indicated price break out right before the price went higher. In other words, someone could take a long position at this price level and with a tight stop loss, the trade would be profitable.

OBV indicator disadvantages

OBV is just a volume indicator and you should have reasonable expectations from it.  We pointed out to some of the main reasons why you should be careful when using OBV indicator:

OBV in Highly liquid markets

When you’re using On Balance Volume indicator in highly liquid markets like Forex main Currencies (e.g. EUR/USD) it can’t help you much to identify whether the signal is right or wrong.

The reason is simple, when there is high liquidity in a market there are many buyers and seller for each price. So the increase in volume doesn’t necessarily cause higher prices.

You can compare the OBV indicator performance in Forex with other markets like stock or cryptocurrency, and you’ll find out it’s more useable on those markets.

OBV after breakouts

The volatility of markets can affect OBV indicator performance quite much.  After price breakouts, OBV can give you wrong signals about buyers/sellers power.  Because OBV is a cumulative volume indicator and just one candlestick volume can considerably affect its final amount.

In these situations, you can’t figure out whether buyers/sellers can maintain their control over price after reaching new levels or they just lost control. In other words, you can use OBV indicator before breakouts to see increasing in volume but after it happened, you should be very careful and use other indicators to confirm price action.

OBV in lower time frames

Lower time frames always consist of high volatility which can make price action noisy.

Like many other indicators which can give you wrong signals in lower time frames, OBV could mislead you in trading decisions too. Therefore, it’s better to not use OBV indicator in lower time frames or confirm its signal with other indicators before opening a position.

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OBV is the helping indicator, that helps to uncover the smart money direction and helps you to go with it to make higher probability trades.

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