Understanding On Balance Volume (OBV)
On Balance Volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price. Developed by Joe Granville in 1963, OBV measures cumulative buying and selling pressure by adding volume on up days and subtracting it on down days.
Key Features of OBV
- Volume-Price Relationship: Tracks whether volume confirms price movements.
- Trend Confirmation: Rising OBV suggests bullish momentum; falling OBV indicates bearish pressure.
Divergence Signals:
- Bullish Divergence: Price makes lower lows while OBV makes higher lows (potential reversal).
- Bearish Divergence: Price makes higher highs while OBV makes lower highs (potential downturn).
Top OBV Strategies
1. OBV Breakout Confirmation
- Rule: Enter long when price breaks resistance with rising OBV; short when price breaks support with falling OBV.
- Example: A stock breaks above $50 with OBV trending upward → Bullish signal.
2. OBV Trendline Strategy
- Draw trendlines on OBV. A break above the trendline confirms bullish momentum; a break below signals bearishness.
3. OBV + Moving Average Crossover
Use a short-term MA (e.g., 20-day) and long-term MA (e.g., 50-day) on OBV.
- Buy Signal: OBV crosses above its MA.
- Sell Signal: OBV crosses below its MA.
4. OBV Divergence Trading
- Bullish Setup: Price downtrend + OBV uptrend → Potential reversal.
- Bearish Setup: Price uptrend + OBV downtrend → Possible decline.
Advanced OBV Indicators
1. OBV with Bollinger Bands
- Purpose: Identifies volatility and overbought/oversold conditions.
- Strategy: Buy near the lower band with rising OBV; sell near the upper band with falling OBV.
2. OBV Strength Relative to Volume
- Measures OBV as a percentage of total volume. High % = strong momentum.
3. Multi-Timeframe OBV
- Compare OBV across timeframes (e.g., 1H + Daily) to confirm trends.
Optimizing OBV for Trading
Best Practices
- Combine with Price Action: Use support/resistance levels for higher-probability signals.
- Filter with RSI: Avoid overbought/oversold traps by aligning OBV with RSI (e.g., OBV rising + RSI > 50 = bullish).
- Avoid Low-Volume Stocks: OBV works best with liquid assets.
FAQs
Q: How is OBV calculated?
A: OBV = Previous OBV + Current Volume (if price up) or – Current Volume (if price down).
Q: Can OBV predict reversals?
A: Yes, divergences often precede reversals but should be confirmed with other indicators.
Q: What’s the best timeframe for OBV?
A: Works on all timeframes; shorter periods (e.g., 15-min) for scalping, daily/weekly for swing trading.
👉 Explore advanced OBV strategies
Conclusion
OBV is a powerful tool for gauging volume-backed trends and reversals. By combining it with other technical tools (e.g., MAs, RSI), traders can enhance accuracy and refine entry/exit points. Always backtest strategies and manage risk!
👉 Master volume analysis with OBV
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