What is On-Balance Volume (OBV) and How Does It Work?

In the world of stock and cryptocurrency trading, On-Balance Volume (OBV) is an important indicator in technical analysis. Check out a more complete explanation about OBV, how it works, and how traders can use it in making trading decisions in this article.

What is On-Balance Volume (OBV)?

On-Balance Volume (OBV) is a technical analysis indicator that measures the positive and negative volume flow of an asset in a certain period. OBV was developed by Joseph Granville in 1963.

OBV is designed to provide insight into whether an asset's trading volume increases or decreases with price changes.

How does OBV Work?

The basic concept behind On-Balance Volume (OBV) is that increasing trading volume can be an indicator that the price direction will follow the same trend.

If volume increases as the price rises, this indicates strong buying pressure. Conversely, if volume increases when price decreases, this indicates strong selling pressure.

For more complete information for you, here is an easy way to calculate OBV.

1. When the closing price is higher than the previous closing price, that day's volume is added to the previous OBV value.
2. When the closing price is lower than the previous closing price, that day's volume is subtracted from the previous OBV value.
3. If the closing price of the day is the same as the previous closing price, the OBV value remains unchanged.

Use of OBV in Trading Analysis

On-Balance Volume (OBV) can provide traders with various signals and insights, namely:

1. Confirm Price Divergence

The divergence between price movement and OBV can provide an indication that the price trend may be reversing.

2. Confirm Breakout

An increase in volume accompanied by a price breakout can provide confirmation that the price movement is strong and sustainable.

3. Identify Accumulation and Distribution

When prices rise but OBV stagnates or falls, this could be a sign that distribution is occurring, whereas if prices fall but OBV rises, this could be a sign of accumulation.

Conclusion

On-Balance Volume (OBV) is one of the useful indicators in technical analysis, helping traders to measure volume flow and identify potential trend reversals or trend continuations. While it is not perfect and cannot be used alone, OBV can be a useful tool in a trader's trading toolkit to make more informed and intelligent decisions.

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DISCLAIMER : This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.