On-Balance Volume (OBV)
Candlefocus EditorThe main premise of OBV is that volume precedes price. It suggests that the more money that is invested in an asset, the greater the chance of the price increasing. Conversely, when investors are taking profits or selling their positions, it serves as a indicators that the price is likely to decline.
To calculate OBV, you must start by taking the cumulative total of volume and subtracting it from the cumulative total of the opposite closing price. You need to add the difference to the cumulative total when the previous day’s close is greater than the current day’s close and subtract the difference when the previous day’s close is less than the current day’s close. OBV is a type of momentum indicator that tracks the total amount of buying and selling pressure in a security. When there is a surge of buying pressure, the OBV will climb. A decline in buying pressure will cause the OBV to decline.
Traders can use stock charting software to plot the OBV line and watch for signals. A rising OBV line indicates that the volume is higher on upwards price movements than on downwards price movements. Conversely, a falling OBV line indicates that the volume is higher on downward price movements than on upwards price movements. This information can help traders identify whether a trend is likely to be bullish or bearish.
The OBV is a powerful tool for technical analysis that can be used to make more informed trading decisions. It captures the sentiment of the market, giving an overview of the current buying and selling pressure. Traders can use it to confirm trends, identify divergences, or spot overbought/oversold conditions. It is important to remember, however, that while volume is an important part of the equation, it is only half the story. Price action and other technical indicators should also be used to inform your trading decisions.