On-Balance Volume (OBV) Definition
On-Balance Volume (OBV) is a technical analysis indicator that uses volume flow to predict changes in the price of a particular asset, such as a cryptocurrency. It operates on the premise that volume often precedes price, meaning that the strength of a price move can be confirmed by the volume of that move. This indicator accumulates volume up and down and directly ties the volume to the price movement of the asset.
On-Balance Volume (OBV) Key Points
- OBV is a momentum indicator that uses volume flow to anticipate price changes.
- It was developed by Joe Granville and introduced in his 1963 book “Granville’s New Key to Stock Market Profits”.
- OBV is based on the cumulative total of the trading volume, adding the volume on up days and subtracting it on down days.
- It is used to confirm price trends and detect divergences that may signal a price change.
- OBV can be applied to any type of asset, including cryptocurrencies.
What is On-Balance Volume (OBV)?
On-Balance Volume (OBV) is a technical analysis tool that traders use to interpret volume information. It is a cumulative indicator, meaning it adds or subtracts volume based on the price movement of an asset within a specific period. If the closing price of the asset is higher than the previous close, the volume is added to the previous OBV. If the closing price is lower, the volume is subtracted.
Why is On-Balance Volume (OBV) important?
OBV is important because it provides traders with valuable information about the strength of price movements. By analyzing volume, traders can confirm the strength of a trend and identify potential reversals. If the OBV is rising while the price is falling or flat, it could indicate that a price increase is imminent. Conversely, if the OBV is falling while the price is rising or flat, it could signal a price drop.
When is On-Balance Volume (OBV) used?
OBV is used when traders want to confirm the strength of a price trend or identify potential reversals. It is often used in conjunction with other technical analysis tools to provide a more comprehensive view of the market. For example, a trader might use OBV in combination with moving averages to confirm a bullish or bearish trend.
Where is On-Balance Volume (OBV) used?
OBV can be used in any market where volume data is available. This includes stock markets, forex markets, commodity markets, and cryptocurrency markets. Many trading platforms and charting tools offer OBV as a standard feature.
How is On-Balance Volume (OBV) calculated?
OBV is calculated by adding the volume on days when the price closes higher than the previous close, and subtracting the volume on days when the price closes lower. The formula is as follows:
If Close > Previous Close then: OBV = Previous OBV + Current Volume
If Close < Previous Close then: OBV = Previous OBV - Current Volume If Close = Previous Close then: OBV = Previous OBV This calculation gives a cumulative volume that is then used to confirm or predict price trends.
