Like when the volatility levels are low, and most importantly when you apply it on longer time frames. The indicator can help identify trend reversals or confirmations. However, you should not rely on its signals as your sole reason to trade. The OBV is most accurate when you apply it alongside other indicators.

Conversely, falling OBV reflects negative volume pressure that can foreshadow lower prices. Granville noted in his research that OBV would often move before price. Expect prices to move higher if OBV is rising while prices are either flat or moving down. Expect prices to move lower if OBV is falling while prices are either flat or moving up.

Trading On Balance Volume (OBV)

When the signal is confirmed, we look at the difference between the opening and closing prices. The next bar closes with a down gap, which is another bear signal. There is a special technical tool designed to spot divergences quickly comparing https://g-markets.net/helpful-articles/what-is-spread-in-forex-trading-and-why-does-it/ the yesterday’s closing price with the current. The chart schematically displays a bearish divergence (purple lines). The up days show a daily volume increase and the line goes up while the on-balance volumes are gradually declining.

• Another note of caution in using the OBV is that a large spike in volume on a single day can throw off the indicator for quite a while.
• Entry for long can be taken when green bar appears; and exit has to be done when it disappears.
• The On Balance Volume Indicator is a momentum indicator that uses the cumulative volume of an asset to signal upcoming trend reversals or breakouts.
• We know that you’ll walk away from a stronger, more confident, and street-wise trader.
• You should also remember that the OBV signals usually happen a few bars before the price movement.
• This script shows On-Balance Volume adjusted for volume weighted candle body size.

Each day we have several live streamers showing you the ropes, and talking the community though the action. Our watch lists and alert signals are great for your trading education and learning experience. Market breadth indicators are an excellent metric to use to gauge the relative stock performance between stocks that are advancing and stocks that are declining. First, I have added a Simple Moving Average to the OBV Study, to identify when the on balance volume is above or below average.

OBV Trend Confirmation

As mutual funds and pension funds begin to buy into an issue that retail investors are selling, volume may increase even as the price remains relatively level. At that point, larger investors begin to sell, and smaller investors begin buying. We are waiting for a confirmation signal from the price chart and on-balance volume. The uptrend should change relative to the previous bars, and the trend line will be broken.

Order flow traders find both indicators useful and may apply each depending on the situation. Earlier we mentioned that traders use the OBV indicator to spot institutional and small investors’ presence. He published the concept in his book “New Key to Stock Market Profits,” where he analyzed the importance of volume for tracking the changes in security prices. After substantial gains have been achieved, traders should look for areas to exit long positions once the OBV indicator flashes a trend peak signal. In the chart example below, we can see markets can find a healthy support level after a period of decline.

What is Fibonacci retracement? How to trade using this indicator?

The MFI’s overbought and oversold territories are used to signal potential entries. Since moves into these zones are rare, traders who use the MFI are fairly confident when they can take a trade based on one of these readings. If the stock closes higher today than it did yesterday, then all of the day’s volume is considered up volume. If the stock closes lower today than it did yesterday, then the volume is considered down volume.

You know that MAs often send false signals in trading flat, and this results in a loss. The purple lines in the chart connect the highs of the candlesticks and the OBV peaks. To trade the MA and OBV forex strategy, you need to add two exponential moving averages with periods 34 and 12.

Standard Divergences

Should you spot such situations, it is an indication that there might be opportunities to buy/sell against incorrect prevailing trends. Asktraders is a free website that is supported by our advertising partners. As such we may earn a commision when you make a purchase after following a link from our website.

Want to see how trades work, not just in theory but in practice? If you don’t happen to have a pro trader living next door, eToro’s CopyTrader is the next best thing. The MFI is very similar to the RSI, with the primary difference being the MFI incorporates volume, while the RSI does not. For this reason, the MFI is sometimes referred to as the volume-weighted RSI. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

An investor could potentially lose all or more of their initial investment. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success. In other words, a stock going up in price is more likely to keep going up. The negative OBV reading occurs when the indicator line goes down.

We know that you’ll walk away from a stronger, more confident, and street-wise trader. What we really care about is helping you, and seeing you succeed as a trader. We want the everyday person to get the kind of training in the stock market we would have wanted when we started out. If the on balance volume crosses above or below the OBV Moving Average, or if there is Positive or Negative Divergence.

It is the OBV indicator with moving average in the MT4 platform. To reduce the time lag, I recommend using the EMA and the OBV indicators together. The principle of spotting false breakouts is based on trend confirmation techniques. A strong trend is always accompanied by the OBV line moving in the same direction. When the trend is false, the OBV line is going in the opposite direction.

The On Balance Volume Indicator is a momentum indicator that uses the cumulative volume of an asset to signal upcoming trend reversals or breakouts. I’ve been day trading for about 5 years and have tried at least different tools. Here are 4 of the best volume indicators for day trading that you should consider incorporating into your trading strategy.

While price action showed indecision and crosses above the moving average before crossing back below the average and moving lower. The OBV would keep a trader out of this trade, perhaps avoiding the price crossover signal. Now, I would like to give an example of a successful OBV trading strategy.

If on-balance volume increases when price increases, you can confirm an upward trend and the volume moves to support the price growth. The indicator can be positive or negative, accordingly oscillating around the zero-value line and between positive and negative values. Don’t get confused if you can’t see the zero line on your chart. The OBV values may be high or low and move further from the line, but at some point, they can cross above or below the zero line. He has worked for financial advisors, institutional investors, and a publicly-traded fintech company. Almost every successful day trader has a system they’re confident in, and most (if not all) of those systems incorporate a volume indicator of some sort.

If the OBV is moving notably in one direction, it could give credence to the idea that a big move could be coming in that direction in price. Its value is also dependent on the starting point of the calculation. Since volume is additive when the asset increases in price, the OBV will tend to follow the general trend of the market. It will tend to increase in uptrends and decrease in downtrends. The OBV works by keeping a running tally on volume in accordance with the direction of a security.