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On Balance Volume Indicator

On Balance Volume Indicator was developed by Joe Granville in1960. In this, it will measure buying and selling pressure as cumulative indicators. On Balance Volume Indicator will add volume on up days and subtract volume on down day. The rising volume confirms the quality of the trend. When the security goes higher than the previous close of the day's volume it is up to volume. Then the security closes at higher as the previous close volume is considered up-volume. OBV is a technical indicator of momentum that uses volume change to make price predictions. They will show crowd sentiment that predicts a bullish/bearish outcome. By comparing relative action between price bar and OBV they generate signals as green at the bottom of the price chart. The indicator acts as the confirmation tool for price trends. The OBV and price are moving in opposite directions indicating a price trend reversal.

Use

The trader uses the indicator to predict price movement when they want to confirm the price trends. The calculation depends on the divergence between the price and volume. The bullish divergence occurs when the price action decreases and OBV increases. The bullish price will display lower lows while the indicator shows a higher low. The bearish divergence is identified when the price continues to rise when the OBV indicator declines. The price exhibit is higher high and on-balance volume has lower highs sign of a bearish divergence. So to confirm the trend direction sees the OBV line that moves in the same direction as the price. The on-balance volume increases with an increase in price. They confirm an upward trend and volume that moves to support price growth.

Advantages

The calculation is easy to understand. OBV provides the signals for a potential breakout when price moves in sideways. They are used to confirm the trend direction that gives the trader method to detect divergences.

Limitations

Here the same volume is added/subtracted if the price moves in a couple of cents/dollars. The OBV incorporates all relevant data needed for price action analysis. The On-balance volume provides a misleading trading alert if you plot it on a smaller time frame.OBV indicator is a massive volume spike day throw off the indicator for months. It is a simple running total of up day and down day volume. So if OBV is moving with the price it confirms the current trend.

on balance volume formula

OBV=Cumulative (Up Volume-Down Volume)
Where: Volume is Actual, Tick; Up Volume is Quantity of volume occurring on up price change. Down Volume is the Quantity of volume occurring on down price change.

Calculation

When the closing price is above the prior close current OBV is equal to the previous OBV plus current Volume. When the closing price is below the prior close the current OBV is previous OBV minus current volume. And when closing prices equal the prior close is current OBV equal to previous OBV.

Conclusion

We can draw a trend line in price as well as in volume to watch pattern similarities.OBV should be used in the daily chart in correlation with the closing chart.OBV in NSE academy certified technical analysis course for beginners and advanced candidates. They will make better trades as you can combine it with other indicators like stochastic for confirmation.

Difference between OBV and Accumulation

On-balance volume and accumulation lines are the same as momentum indicators that use volume to predict the movement of smart money. They will calculate by summing the volume on up-day. Then subtract the volume on a down day. The formula is used to create the accumulation of different OBV.