The on balance volume (OBV) indicator was created in 1963 by Joe Granville for use in the stock markets and became popular amongst professional traders. The on balance volume is primarily a trend indicator that is calculated according to the volume of trading. It is essential that in the methodology of its calculation, it does not have an averaging model; therefore, it is an indicator synchronous with the price. OBV is an easy to interpet and useful technical indicator for numerous trading styles. As the author of the indicator himself said, it is the volume that is the steam on which the steam engine works. In otherwords, it is the forex trading volume that moves the forex market.
What is the On Balance Volume indicator?
It is believed that if the current closing price of the period is higher than the previous one, then the volume of the candle is added to the value of the on balance volume indicator. If the current close price is lower than the previous one, then the volume figure is subtracted from the indicator. If the current price coincides with the previous one, the on balance volume indicator remains unchanged. The on balance volume is usually displayed in its own area of the price chart (below the chart in the example below).
How the On Balance Volume indicator works?
To understand how the on balance volume value works, you can attach the indicator to your charts and observe how it reacts to market movements.
If the last candle on it is rising, and its closing price is higher than the previous candle, so the current trading volume will be added to the on balance volume indicator and logically credited to the bull volumes, showing that they are in control.
At the same time, the on balance volume line is growing. If the closing of the price candle would be lower than the previous one, then the indicated volume would be deducted from the on balance volume indicator and attributed to the volume of the bears, showing that they are currently dominating. In this case, the on balance volume line would decrease by the indicated volume value.
If the current value of the price is equal to the previous one, the on balance volume remains unchanged, showing that there is no leading group in the market. That is, if on balance volume rises, then bulls dominate, if it decreases, bears lead. If it does not change, there is no winner in the market, and the price stands still.
The value of on balance volume is represented by the accumulation of volumes of bulls and bears for the corresponding periods and is expressed directly in units of volume that will be different for each asset and even the time format taken (since the daily volume is usually more than the trading volume, for example, in one hour).
The on balance volume also forms trends and figures, thereby showing whether the current price trend supports the volumes of professional participants or not. In other words, if the on balance volume consistently updates its extremes in the presence of a similar price trend, then the trend is established. And vice versa – if, when updating an extremum at a price, the on balance volume is no longer able to update its extremum. This suggests that professional participants no longer support the trend and in such a situation a price reversal is quite likely.
On Balance Volume strategy
Set the time interval to 1-hour or 30-minutes on the indicator.
The on balance volume strategy shows the upcoming change in trend direction. As soon as a signal appears, it can signal that the trend may change direction soon.
- When a reversal occurs after a long uptrend and the price starts falling, we may look to sell an asset.
- After a reversal from a downtrend to an uptrend, we may look to buy an asset.
Short trading signal
- Wait for the price to start consolidating in a long uptrend.
- The on balance volume should be making top.
- The green volume lines should start decreasing.
Buying trading signal
- Wait for the price to start consolidating in a long downtrend.
- The on balance volume should be making bottom.
- The green volume lines should start decreasing.
On Balance Volume conclusion
There are several variations to trade the on balance volume indicator. The on balance volume indicator is flexible to differing market conditions, thus can be used as part of a forex trend trading strategy and forex range trading strategy. However, notice that on balance volume indicator may lag like any other statistical indicator.
The methods of implementing the on balance volume indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the on balance volume indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.