Greetings traders and welcome back to another Survival Guide.
Chris here, bringing you some more information,
and today, we are going to be talking about the On Balance Volume indicator,
otherwise known as the OBV.
This is another technical analysis based production, which means
those of you that are interested in learning strategies
will stick around because we're going to be talking about a few
that you can employ with the OBV indicator. But without further ado,
let's get going and dive on into that material,
and if you haven't subscribed yet,
please do so. It allows me to keep coming out with these informative videos
for all of you guys out there, but let's dive on into it. Cheers folks.
In the world of trading, technical analysis traders have a
ton of indicators to choose from. In the indicators category,
there is a subcategory called "momentum indicators" and there's
a very large amount of indicators in this category as well.
It can be difficult for traders to know which one to navigate,
which one to use, or spend their time with, so today
we're going to clear up one of the popular options called the On Balance Volume indicator.
It uses volume information to better give the trader a depiction
of what is going on in the market currently.
The On Balance Volume indicator is also
referred to as OBV for short, and is a momentum indicator
that uses that volume flow information to help traders better
predict those stock change prices or asset change,
it doesn't matter if it's a stock or what have you.
Another way to look at the OBV indicator is look at it as a tool
that reflects the way the crowd sentiment predicts the bullish
or bearish market outcomes.
Alternatively, we can look at it as a way to measure the buying and selling pressure
that's currently being employed on the market.
The indicator was introduced by Joseph Granville back in 1963.
He published the concept in his book "New Key to Stock Market Profits"
if you are interested in reading a bit more about it.
The concept of the indicator is based on the idea when
there is an increase in trading volume, even if it doesn't affect
price at first, at some point it will.
The price will then go up or down, depending on what types of orders prevail.
When it was first introduced, it was considered something revolutionary.
Even today, it remains widely popular despite
the effect that the market manipulation attacks on volume-based
indicators took towards the later portion of market development.
Traders still today use the OBV indicator as a tool to help them
find out when institutional and retail investors are
present on the market and to distinguish the volume generated
by either of those groups.
If for example the volume increases, but the price remains
relatively flat, at first, it is considered that this could
be an indication that pension and mutual funds might be buying instruments
that retail investors are selling.
Once price follows and the volume goes up, institutional investors might
start selling while retail investors start buying for example.
To understand what the OBV indicator is, the best way to do it
is just to simply take a look at it.
Let's start by saying that the OBV indicator is a cumulative indicator.
This means whenever there is a change in the instrument's price,
the volume is adjusted in the cumulative OBV total.
For example, if the price increases, the volume is added to the OBV.
While if the price drops, the volume is subtracted.
There is also a third scenario where the price remains stable.
In that case, no volume is added or subtracted.
Depending on the market state, the value of the OBV can be either positive or negative.
Positive values are recorded when today's price
exceeds the closing price of the previous day.
While negative values appear when today's price is below yesterday's closing price.
The OBV indicator can also be seen as an oscillator around the zero line.
However, because of how the on balance indicator works,
traders don't actually usually say they care much about its numerical value,
but instead, they look at the nature of the indicator's movement
and the slope of the line itself.
Here, we can see the OBV line as it's oscillating back and forth
between its numerical values.
The line goes up. The line goes down.
But what traders are generally focusing on, instead of
an exact numerical value,
instead they're focusing on the degree of the slope of the line as well
as other things about it, as we'll discuss here shortly.
The formula used to calculate the On Balance Volume indicator
is relatively simple and here we can see it. If you are interested
feel so inclined to pause the video take a picture, write it down,
whatever it is you need to do.
But remember, at the end of the day, this is an indicator,
which means we don't necessarily need to do any math
pretty much ever, because the indicator is doing it for us.
But I always feel it necessary to share where the information is coming from
so we can better understand the process.
The most common uses of the OBV indicator in today's trading markets
by traders is to use it in a way to help identify
trend conformations, trend reversals, oversold or overbought
scenarios in the market.
These are the most common ways that traders, and the most
common purposes that traders are looking to find with the OBV indicator.
In the beginning, we mentioned that traders
who use the OBV indicator are doing it to spot institutional
and small investors' presence. Now, if we were to get practical about this,
we can see how we might theoretically be able to
capitalize on this. If we were to look for divergences
between the price of an asset and volume,
the divergences can help us as technical traders potentially
recognize two upcoming market moves.
We have the first scenario where the spot price decreases
when the Trading Volume goes down without a simultaneous price decrease.
Then we have if the spot price increases when the
Trading Volume goes up without a simultaneous price increase.
If we were to spot such situations,
we could potentially take this as an indication that there might
be an opportunity to buy or sell against incorrect prevailing trends.
One of the most basic ways that we could theoretically
capitalize on these situations would be by looking to sell
when we see the volume going down without being followed
by an immediate drop in price, or the other way around,
and to buy when we see the trading volume going up without
a follow-up price jump.
The OBV indicator is suggesting to us that price will soon
follow if this is how we are interpreting it.
As with all indicators, it's best to couple it with outside information,
knowledge, and/or other technical analysis.
Here we have a bearish divergence scenario.
This is one of the trading strategies that traders today
using the OBV indicator employ.
They keep a lookout for this bearish divergence, which occurs
when price itself, the price of the asset we're measuring,
marks a new high, meaning price is going upwards. While during the OBV scenario,
it is actually marking lower highs.
We have a divergence between the price of the asset and the OBV itself.
This is usually an indication that the market is about to exhibit
a correction and fall to match the OBV.
So, this is a potential scenario where we could potentially
jump in for a sell opportunity in anticipation of the fall to come.
The bullish divergence, as you might expect, is the exact opposite
scenario of the bearish divergence.
We want to see price getting lower while the OBV is actually getting higher.
This is an indication that we may have bullish pressure to come
as the market corrects to match the OBV. What we can
do in a scenario like this, is by coupling a good Price Action Entry
around the time that we have spotted the divergence,
the bullish divergence that is, we can look for a buy opportunity in the market
with the expectation that prices will rise thereafter.
Another popular strategy that traders trading with the OBV do, is look for
trend confirmation with the OBV and price itself.
The reasoning here is simple. If a particular asset's price
is rising in harmony with volume,
you have a confirmation that the trend is most likely stable.
For example, if you see a price uptrend reflected in the
volume in the OBV, then the theory suggests that we should
expect the trend to continue further.
It's also useful to consider the OBV line slope itself.
We have the slope marked off down here with the green lines already.
A higher slope, a more inclined slope, indicates
a stronger trend when price itself is matching it.
However, keep in mind that if the change in the slope is too drastic
it can also indicate that a trend may be approaching it's
end because it has already experienced incredible amounts
of volume and price growth in that short period of time
to allow the line to grow so rapidly.
To provide a secondary level of confirmation, traders will often apply
a 20-period moving average across their OBV indicator itself.
Another widely popular OBV strategy is identifying breakouts
with the help of the OBV in conjunction with price itself.
To do this, traders usually start by identifying key strong
support and resistance areas. This way they can put a box
on where price is currently contained.
Then, they're looking for the OBV to provide a similar story.
Like in this image here, we can see that we found support during prices drop off
and at the same time we found an area of support on the OBV indicator.
We also found resistance towards the top of this box
and so did the OBV indicator.
There was an area where the OBV was having a hard time passing
and there was an area where price itself was having a hard time passing.
The concept here is to pay attention for when price breaks
and which direction price breaks. If price breaks out of the
top of the OBV box, as you can see in this circle,
then we're going to be looking for a buying opportunity most likely,
as long as price is also breaking out of its contained zone on the price chart.
If we're breaking on the OBV and we're breaking
with price, then chances are we have ourself
a strong buying signal in this scenario.
If we were to reverse it the other way around and price instead
was falling after it broke out of the box, and price was falling
out of the OBV contained zone, then chances are
we would have ourselves a strong sell signal.
Paying attention to volume allows us as traders to identify
potential scenarios where market participants might be losing
momentum and a stable shift in the trend direction may be
about to take place.
These situations are usually described as a bull or bear
exhaustion, and are followed by the divergences that
we discussed previously. The idea is that a rising market should be
accompanied by an increasing volume. That is because
to keep pushing price upwards,
market participants require increasing enthusiasm. Traders applying the OBV indicator
to identify overbought and oversold markets usually
do this with a strong tendency to revert to that mean
and apply this concept. In doing this, traders are looking at
the discrepancy between the OBV line and price trend.
If the trend has moved too much in either direction, while the
OBV is lagging or moving in the opposite direction, the traders
usually consider this as a good momentum trigger
to anticipate that market reversal and be aware of it
and enter in anticipation of it.
When price is making new highs but the OBV marks lower highs, there's a good chance
we will witness a price reversal. The concept here incorporates
that divergent style strategy. When we see the OBV line telling
one story, but it's not agreeing with trend itself,
that's usually an indication of exhaustion whether it's going
up or down at the time of occurrence.
As with all strategies, using the OBV indicator as a trading strategy
should definitely be practiced before going live.
We want to be comfortable with the read.
We want to be proficient with the information that we're seeing,
and understand, and make sure that we're understanding it correctly.
The OBV indicator is great because it's easy to use for beginners,
it provides some insight into the market volume itself,
and can give you some very clear identifications when price might be
reaching its end in an uptrend, or might finally hitting
a bottom in a downtrend because the OBV is going another direction.
On the downside, OBV indicator isn't something that we want to use by itself.
It's best used when coupled with outside price action techniques,
or just outside price knowledge of what you're trading.
It's the same as pretty much any other indicator out there.
It can provide a clear image of certain aspects of information
to help you better understand if it's a good time to jump
in or out of the market, but that information alone should
never be your only reason for entering.
Until next time folks, please click that like and subscribe button down below
so I can keep coming out with these videos for you guys.
I will see you in the next one. Cheers folks!