On Balance Volume (OBV) Technical Indicator [Volumes]
On Balance Volume (OBV) indicator - is a technical exchange indicator, which connects volume and accompanying price change. The essence of the OBV indicator is the following: when the closing price of the current bar is higher than the previous bar closing price, the volume of the current bar is added to the previous indicator value. The reverse situation: if the current bar closing price is lower than the previous one, the current volume is subtracted from the previous OBV value.
It is a standard indicator of trading MetaTrader terminal.
Principles of On Balance Volume indicator operation
The principle underlying On Balance Volume indicatorThe OBV, which is a very good indicator, suggests that the indicator changes ahead of the price changes. According to this principle, a sharp growth of the OBV indicates that professional investors with large capitals are working with the instrument. When the broader public joins the trade, the price and balance volume begin to rise at a slower pace.
If the price moves ahead of the OBV, there is "lack of confirmation.". This can be seen at the top of a rising market (in which case the price rises without a corresponding increase in OBV or ahead of it) or at the base of a falling market (the price falls without a corresponding decrease in OBV or ahead of it).
Trading signals from the On Balance Volume indicator
About the upward trend of the On Balance Volume indicator can be said when each new high is higher than the previous high and each new low is higher than the previous low. A downtrend On Balance Volume involves lower highs and lows. If the indicator remains in a horizontal corridor, it indicates an uncertain trend.
After stabilization, the trend continues until fracturewhich occurs in two ways. The first is a change from an upward trend to a downward trend. The second is a reversal.
In the case of the transition downward trend in the ascending direction the indicator On Balance Volume should be in a state of uncertainty for more than three periods. I.e. if upward trend changes to sideways and remains so for only two periods, and then changes back to upward, it means that the trend of the indicator has been ascending all this time.
After a trend change in the OBV indicator, a "breakout" occurs, which indicates that a price impulse is approaching. This is a signal to open long positions at the break of the OBV upwards and, accordingly, to the opening of the short positions when the OBV breaks down.
Formula for calculating the On Balance Volume indicator
When the current closing price is higher than the previous price, then:
OBV (i) = OBV (i - 1) + VOLUME (i).
When the current closing price is lower than the previous price, then:
OBV (i) = OBV (i - 1) - VOLUME (i).
When the current closing price is equal to the previous price, then:
OBV (i) = OBV (i - 1),
Where:
- OBV (i) - the value of the indicator in the current period;
- OBV (i - 1) - the value of the indicator in the previous period;
- VOLUME (i) - the volume of the current bar.