On-Balance Volume

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Understanding On-Balance Volume

Developed by Joe Granville in the 1960s, On-Balance Volume (OBV) is an indicator designed to measure buying and selling pressure as a cumulative number based on volume.

The basic premise is simple: when the price closes higher than the previous close, the current period's volume is added to the OBV; when it closes lower, the volume is subtracted.

This gives traders insights into market sentiment, as rising OBV suggests that buyers are willing to step in, while declining OBV indicates selling pressure.

How OBV is Calculated

Start with an initial OBV value of zero at the first data point on the chart.

For every price increase, add the current volume to the OBV.

For every price decrease, subtract the volume from the OBV.

If the price closes the same, the OBV remains unchanged.

This cumulative method means that even a small move in price can produce large swings in OBV if the volume is high.

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Insights Gained from OBV

OBV helps to confirm trends; if prices are moving higher and OBV is also rising, it suggests that the upward trend may continue.

Conversely, if prices rise but OBV declines, it may indicate that the price rise is not supported by strong buying and could reverse.

Traders often look for divergences between OBV and price action to predict potential reversals.

Strengths of On-Balance Volume

Provides advanced warnings of potential trend reversals when combined with other indicators.

Effective for identifying price trends in volatile markets where traditional indicators may lag.

Can be used across multiple time frames and asset classes, making it versatile for traders of different strategies.

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Limitations of OBV

Does not consider volatility; thus, significant price changes can lead to misleading signals when volume is light.

Can sometimes signal misleading trends in sideways markets where price may fluctuate without significant volume changes.

Modern adaptations of OBV, like the MR Sentiments by Volumes indicator, offer refinements to overcome some original limitations of OBV calculations.

Real-World Applications

Traders often combine OBV with other analyzing tools like moving averages or MACD to enhance decision-making.

Using OBV in conjunction with range indicators can offer clearer insights into potential breakout points based on volume trends.

Utilizing the OBV alongside the advanced indicators found in the EASY series, such as EASY Trendopedia and EASY Breakopedia, can provide a comprehensive approach to volume analysis in trading strategies.

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