What is OBV?

The OBV or On Balance Volume is an open-ended indicator related to prices and volumes.  Developed by the American Joseph Granville, who used to say that volumes are in trading ”the steam that makes the train whistle”, this indicator makes it possible to reliably identify the different phases of the market: accumulation (buying pressure) and distribution (selling pressure).

If the OBV goes up, it is said that the buyers are in force. This indicator is used to analyze whether price movements are supported by volumes.

 

Calculation

This indicator represents the total volumes traded: during an upward trend, volumes are added as the trend progresses. In periods of decline, volumes are simply subtracted.

The courses are mounted: OBV = previous OBV UT + new OBV UT

Prices have fallen: OBV = OBV of the old UT – OBV of the new UT

Prices have stagnated: previous OBV UT = new OBV UT

 

Strategy

When prices move in synchronization with the OBV, the trend is said to be sustainable: if the OBV rises again and the price rises, the advance is supported by volumes and everything is fine. Ditto for a drop.

On the other hand, when the OBV moves in the opposite direction of prices (diverging from prices), this indicates a potential loss of momentum in the trend: the trend does not seem to be followed by volume and this is a worrying sign.

 

Capture d’écran 2018 11 13 à 11.54.08

Example of divergence between volumes (OBV) and prices on BTC in 4 hours. Volumes very often indicate a weakening / reversal of the trend. Here, the smart money was probably starting to sell before prices fell: it is easy to hide on prices, but volumes are like eyes: they rarely lie!


Want to learn more? The following articles may be of interest to you

”The momentum”

”Commodity channel index” 

”Reading a chart” 

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