On balance volume (OBV)

From binaryoption
Jump to navigation Jump to search
Баннер1

```wiki

  1. On Balance Volume (OBV)

On Balance Volume (OBV) is a momentum indicator that uses volume flow to predict price changes. Developed by Joseph Granville in the 1960s, OBV attempts to relate price and volume, theorizing that volume precedes price. It is a widely used tool in technical analysis and can provide valuable insights into the strength or weakness of a trend. This article provides a comprehensive guide to understanding and utilizing OBV, aimed at beginners.

Core Concept

The fundamental idea behind OBV is that volume is a leading indicator of price. Granville believed that significant volume changes often foreshadow price movements. If price is rising and volume is increasing, it suggests the trend is likely to continue. Conversely, if price is falling and volume is increasing, it suggests the downtrend is likely to persist. However, divergences between OBV and price can signal potential trend reversals.

Calculation

The OBV is calculated as a cumulative sum of volume, with volume being either added or subtracted based on whether the price closed higher or lower than the previous day's close. Here's the formula:

OBV = Previous OBV + (Current Volume if Price Up, -Current Volume if Price Down)

Let's break this down with an example. Suppose we have the following daily data:

| Date | Price | Volume | |---|---|---| | Day 1 | $10 | 100 | | Day 2 | $11 | 150 | | Day 3 | $10.50 | 120 | | Day 4 | $12 | 180 | | Day 5 | $11.50 | 140 |

Here's how the OBV would be calculated:

  • **Day 1:** OBV = 100 (Starting point – initial volume)
  • **Day 2:** Price went up ($10 to $11). OBV = 100 + 150 = 250
  • **Day 3:** Price went down ($11 to $10.50). OBV = 250 - 120 = 130
  • **Day 4:** Price went up ($10.50 to $12). OBV = 130 + 180 = 310
  • **Day 5:** Price went down ($12 to $11.50). OBV = 310 - 140 = 170

Therefore, the OBV values for each day are: 100, 250, 130, 310, 170. This cumulative process creates a line that visually represents the relationship between price and volume.

Interpretation

Interpreting the OBV line requires a grasp of several key concepts.

  • Rising OBV confirms an uptrend: When both price and OBV are trending upwards, it signifies strong buying pressure and suggests the uptrend is likely to continue. This confirms the bullish trend.
  • Falling OBV confirms a downtrend: Conversely, when both price and OBV are trending downwards, it indicates strong selling pressure and suggests the downtrend is likely to continue. This confirms the bearish trend.
  • OBV Divergence: This is perhaps the most important aspect of OBV interpretation. Divergence occurs when the price and OBV move in opposite directions.
   * Bullish Divergence:  Price makes new lows, but OBV makes higher lows. This suggests that selling pressure is diminishing, and a potential price reversal to the upside is likely.  Traders often look for this as a signal to buy. This is a common signal used in reversal patterns.
   * Bearish Divergence: Price makes new highs, but OBV makes lower highs. This suggests that buying pressure is diminishing, and a potential price reversal to the downside is likely.  Traders often look for this as a signal to sell. This is similar to head and shoulders pattern signals.
  • OBV Trendlines and Support/Resistance: Like price charts, trendlines can be drawn on the OBV line itself. Breakouts of these trendlines can indicate a potential change in momentum. Areas where OBV has historically reversed direction can act as support or resistance levels.
  • OBV as a Leading Indicator: The OBV often begins to move *before* the price. A change in the OBV direction can provide an early warning of a potential price reversal.

Practical Applications and Trading Strategies

Here are some ways to incorporate OBV into your trading strategies:

1. Confirmation of Trends: Use OBV to confirm existing trends. If you've identified an uptrend using other indicators like Moving Averages, a rising OBV line strengthens the signal. 2. Spotting Potential Reversals: Focus on identifying bullish and bearish divergences. These divergences can provide early signals of potential trend reversals. Combine these signals with candlestick patterns for higher probability trades. 3. Trading Breakouts: Look for breakouts in the OBV line itself. A strong breakout in OBV, especially accompanied by increasing volume, can signal a powerful move in the price. 4. Using OBV with Support and Resistance: Identify significant support and resistance levels on the OBV line. A break above resistance in OBV can indicate increasing buying pressure, while a break below support can indicate increasing selling pressure. 5. Combining OBV with other Indicators: OBV works best when used in conjunction with other technical indicators. For example: 

   * OBV and RSI: Combine OBV with the Relative Strength Index (RSI) to confirm overbought or oversold conditions.  If OBV is showing bullish divergence while RSI is oversold, it's a stronger buy signal.
   * OBV and MACD: Use OBV to confirm signals from the Moving Average Convergence Divergence (MACD). If MACD is crossing over, and OBV is rising, it suggests a strong bullish signal.
   * OBV and Volume Weighted Average Price (VWAP): Compare OBV trends with the VWAP to identify areas of value and potential buying/selling opportunities.

Limitations of OBV

While OBV is a valuable tool, it’s important to be aware of its limitations:

  • Lagging Indicator: OBV is a lagging indicator, meaning it's based on past price and volume data. It doesn't predict the future, but rather reflects what has already happened.
  • Sensitivity to Price Fluctuations: OBV is sensitive to even small price fluctuations, which can generate false signals, especially in choppy markets.
  • Doesn’t Account for Gap Moves: OBV doesn't handle gap moves (significant price jumps with no trading in between) very well. The gap is treated as a large price change, which can distort the OBV line.
  • Subjective Interpretation: Interpreting divergences and trendlines can be subjective, leading to different conclusions among traders.
  • False Signals in Sideways Markets: In sideways or range-bound markets, OBV can generate numerous false signals as the price oscillates without a clear trend.

Advanced Considerations

  • Rate of Change of OBV: Calculate the rate of change of OBV to identify the momentum of the volume flow. A rising rate of change suggests accelerating buying pressure, while a falling rate of change suggests accelerating selling pressure.
  • OBV Histogram: Create an OBV histogram by subtracting the previous day's OBV from the current day's OBV. This can help visualize the changes in volume flow more clearly.
  • Comparing OBV Across Multiple Assets: Compare the OBV of different assets to identify relative strength or weakness. An asset with a rising OBV compared to others may be a good investment opportunity.
  • Using OBV in Different Timeframes: Analyze OBV on different timeframes (e.g., daily, weekly, monthly) to get a broader perspective on the trend. Aligning OBV signals across multiple timeframes can increase the reliability of your trading decisions.

OBV vs. Volume Price Trend (VPT)

The Volume Price Trend (VPT) is another volume-based indicator similar to OBV. However, VPT calculates volume contribution based on the percentage change in price, rather than simply adding or subtracting volume based on whether the price closed higher or lower. VPT is generally considered more sensitive to price changes than OBV. Both indicators can be useful, but VPT may provide earlier signals in some cases.

OBV vs. Accumulation/Distribution Line (A/D)

The Accumulation/Distribution Line (A/D) is another indicator attempting to relate price and volume. It differs from OBV in how it weighs volume based on the price's position within its daily range. A/D considers where the price closes relative to the high-low range, assigning more weight to closes near the high for accumulation and near the low for distribution. A/D is often considered more sophisticated than OBV.

Resources for Further Learning

  • StockCharts.com - On Balance Volume (OBV): [1]
  • Investopedia - On Balance Volume (OBV): [2]
  • TradingView - On Balance Volume (OBV): [3]
  • BabyPips.com - On Balance Volume (OBV): [4]
  • [[The Pattern Site - OBV Divergence]: [5]
  • [[Technical Analysis of the Financial Markets by John J. Murphy]: A comprehensive textbook on technical analysis.
  • [[Japanese Candlestick Charting Techniques by Steve Nison]: A classic guide to candlestick patterns.
  • [[Trading in the Zone by Mark Douglas]: A book on the psychology of trading.
  • [[Mastering Technical Analysis by Dean Prater]: Another detailed text on technical analysis.
  • [[Understanding Options by Michael Sincere]: A guide to options trading.
  • [[Volatility Trading by Euan Sinclair]: A book on volatility trading strategies.
  • [[Algorithmic Trading: Winning Strategies and Their Rationale by Ernie Chan]: A book on algorithmic trading.
  • [[Behavioral Finance and Wealth Management by Daniel Crosby]: A book on behavioral finance.
  • [[Candlestick Forecasting by Martin Pring]: A book on candlestick analysis.
  • [[Intermarket Analysis by Lawrence G. McMillan]: A book on intermarket analysis.
  • [[The Little Book of Trading by George Angell]: A concise guide to trading.
  • [[Reminiscences of a Stock Operator by Edwin Lefèvre]: A classic fictionalized biography of a successful trader.
  • [[Market Wizards by Jack D. Schwager]: Interviews with top traders.
  • [[New Market Wizards by Jack D. Schwager]: Further interviews with top traders.
  • [[How to Make Money in Stocks by William J. O'Neil]: A guide to CAN SLIM investing.
  • [[Trade Like a Pro by Mark Minervini]: A book on high-growth stock investing.
  • [[The Intelligent Investor by Benjamin Graham]: A classic book on value investing.
  • [[One Up On Wall Street by Peter Lynch]: A book on investing in what you know.
  • [[Security Analysis by Benjamin Graham and David Dodd]: The foundational text on security analysis.
  • [[The Disciplined Trader by Mark Douglas]: A book on trading psychology.
  • [[Thinking, Fast and Slow by Daniel Kahneman]: A book on cognitive biases.

Conclusion

On Balance Volume is a powerful tool for understanding the relationship between price and volume. By mastering the concepts of OBV interpretation and incorporating it into your trading strategy, you can gain a valuable edge in the market. Remember to use OBV in conjunction with other technical indicators and risk management techniques for optimal results. The key is consistent practice and a thorough understanding of its strengths and limitations.

Technical Indicators Volume Analysis Trend Following Momentum Trading Divergence Chart Patterns Swing Trading Day Trading Price Action Risk Management ```

Start Trading Now

Sign up at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)

Join Our Community

Subscribe to our Telegram channel @strategybin to receive: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners

Баннер
Retrieved from "https://binaryoption.wiki/index.php?title=On_balance_volume_(OBV)&oldid=46902"