How to use OBV indicator for successful trading?
The On balance volume (OBV), one of the most widely using technical indicator is used in (technical analysis) to measure buying and selling pressure of a security. It was known as “Continuous Volume” by Woods and Vignola, later named “OBV” by Joseph Granville.
This is One of the widely used Leading as well as momentum indicators in Technical Analysis. Being a Leading indicator, it’s best used to find the new trading opportunities. This can be used to detect the price trends on stocks, indices, commodities and Forex
The OBV measures buying and selling pressure (of a security) as a cumulative indicator that adds volume on up-days and subtracts volume on down-days.
When the stock or security does close higher than its previous close, all of the day’s volume is considered up-volume. While the security closes lower than its previous close, all of the day’s volume is considered down-volume.
Like RSI, the OBV is considering as a momentum oscillator , where as the pattern analysis can be combined with OBV to get the precised Signal robustness. The direction and trajectory of OBV is much important for Swing as well as short term trades. It is always to pick Securities having strong fundamentals like Advancing EPS, less PE ratio etc.
The construction of OBV
If Today’s close is > Yesterday’s Close then: OBV = Yesterday’s OBV + Today’s volume
If today’s close is < yesterday’s close then: OBV = Yesterday’s OBV – Today’s Volume
If today’s close is equal to yesterday’s close then: OBV = Yesterday’s OBV
Where, OBV = The current on balance volume Level.
Volume = The latest trading Volume Amount.
Working of OBV
If the OBV is moving strongly in one direction, it could give some idea about the price movement in the same direction.
- When Both Price and OBV are making higher peaks and higher troughs , it confirms the upward trend to continue.
- When Both Price and the OBV are making lower peaks and lower troughs, the downward trend is Likely to continue.
- During a trading range, if the OBV is Slowly rising, accumulation may be taking place, which could be the Sign of an upward breakout.
The below example is based on the Stock DCM SHRIRAM .
Trading with divergence:
- When price increases but OBV declines – Bearish OBV Divergence
- When the price declines but OBV advances – Bullish OBV Divergence
- If the OBV shows a divergence from price movement, a price reversal is imminent.
Example, if the price is rising, but the OBV starts to drop, a possible selling opportunity may exist.
When to Buy?
- OBV trading above EMA (20).
- OBV trend line bullish break out.
- Confirmation by bullish candlestick.
- Positive Divergence will add better reversal.
Selling with OBV
OBV trading below EMA (20).
OBV trend line bearish break down.
Confirmation by bearish candlestick.
Negative Divergence will add better reversal