OVERVIEW ON BALANCE VOLUME - OBV

On balance volume - OBV is an indicator used to measure trading pressure developed by Joe Granville, this is the first indicator to measure the flow of negative and positive volume (volume).

The negative volume here is only in the calculation method (multiply the volume by the coefficient -1), specifically:
  • If the close is higher than the opening price (ie bullish candlestick): current OBV = previous OBV + New volume level
  • If the close is lower than the opening price (ie a bearish candlestick): current OBV = previous OBV - New volume level
  • If the closing price is equal to opening price: current OBV = previous OBV (unchanged)
The theory behind this indicator is that volume is ahead of price, and therefore signals coming from the indicator may act as a "guide" for the price direction.

THE APPLICATION OF ON BALANCE VOLUME - OBV

Below are the most basic applications when using On balance volume - OBV

1. Divergence

The first use of OBV is a divergence, a type of early warning signal that indicates the possibility of a price reversal. Basically:
  • A bullish divergence occurs when the price makes new lows and OBV does not.
  • Bearish divergence - Bearish divergence occurs when the price makes new highs and the OBV does not.

The example above shows a very nice Bullish divergence signal. The first is a complete bullish divergence, followed by a breakout of OBV (blue line) and finally a price breakout of the overhead resistance.

Or as an example of this sell order:


The signal that OBV brings is much earlier than the price. After a bearish divergence occurs and OBV breaks the barrier, the price then turns down.

2. Confirm the trend

Trend confirmation is the next application of the OBV indicator. Basically:
  • When OBV breaks the upper hurdle and continues to maintain its uptrend, the market is in an uptrend.
  • When OBV breaks the lower hurdle and continues to maintain its downtrend, the market is in a downtrend.

In the illustration, the uptrend starts when OBV breaks down in red and goes up, a downtrend starts when OBV breaks down in blue and goes down.