On Balance Volume (OBV)

On Balance Volume (OBV): A Beginner's Guide

Welcome to the world of cryptocurrency trading! Understanding technical indicators can seem daunting, but we’ll break down one very useful tool: On Balance Volume (OBV). This guide is for complete beginners, so we’ll keep things simple and practical.

What is On Balance Volume (OBV)?

On Balance Volume (OBV) is a momentum indicator used in technical analysis that relates price and volume. Essentially, it tries to show whether volume is flowing into or out of a cryptocurrency. It’s based on the idea that volume precedes price. A rising OBV suggests buying pressure, while a falling OBV suggests selling pressure.

Think of it like this: if a cryptocurrency’s price is going up and lots of people are buying (high volume), that’s a strong signal. If the price is going up, but very few people are buying, that’s a weaker signal and could be a sign the price rise won't last. OBV helps to visualize this relationship.

How is OBV Calculated?

The calculation looks complicated, but don’t worry, you won’t be doing it by hand! Most charting software, like those found on Binance Register now, Bybit Start trading, BingX Join BingX, BitMEX BitMEX or TradingView, will calculate it for you. Here’s the basic idea:

1. **Start with a base OBV of zero.** 2. **For each day (or time period):**

  * If the price *closes higher* than the previous close, add the day’s volume to the OBV.
  * If the price *closes lower* than the previous close, subtract the day’s volume from the OBV.
  * If the price *closes the same* as the previous close, the OBV remains unchanged.

So, OBV isn't about the price *itself*, but the *change* in price and how that change relates to the volume traded.

Interpreting the OBV Indicator

Here's how to interpret the OBV indicator:

• **Rising OBV:** Generally indicates that buying pressure is dominant. This confirms an uptrend and suggests the price is likely to continue rising.
• **Falling OBV:** Generally indicates that selling pressure is dominant. This confirms a downtrend and suggests the price is likely to continue falling.
• **Divergence:** This is where things get interesting! Divergence occurs when the price and OBV move in opposite directions.

   * **Bullish Divergence:** Price makes lower lows, but the OBV makes higher lows. This suggests the selling pressure is weakening and a price reversal might be coming. This is a good trading signal.
   * **Bearish Divergence:** Price makes higher highs, but the OBV makes lower highs. This suggests the buying pressure is weakening and a price reversal might be coming. This is a signal to be cautious and potentially consider selling.

• **OBV Trendlines:** You can draw trendlines on the OBV chart, just like you would on a price chart. A break of an OBV trendline can signal a change in momentum.
• **OBV as Support and Resistance:** Areas where OBV has previously reversed direction can act as support or resistance levels.

OBV vs. Price: A Comparison

Let's look at how OBV compares to price action.

Feature	Price	OBV
What it shows	Actual market value of the crypto	Cumulative buying and selling pressure
Leading or lagging	Generally considered leading	Generally considered lagging, but can *anticipate* moves
Primary use	Determining entry and exit points; identifying trends	Confirming trends, identifying divergences, gauging strength of a move

Practical Steps for Using OBV

1. **Choose a Cryptocurrency:** Select a cryptocurrency you want to analyze, like Bitcoin or Ethereum. 2. **Find a Charting Tool:** Use a platform like TradingView, Binance Register now, or Bybit Start trading that displays OBV. 3. **Add the OBV Indicator:** Most charting tools have an indicator library where you can add OBV. 4. **Look for Trends:** Observe the overall trend of the OBV. Is it rising, falling, or moving sideways? 5. **Identify Divergences:** Pay attention to divergences between the price and the OBV. 6. **Combine with Other Indicators:** Don’t rely on OBV alone! Use it in conjunction with other technical indicators like Moving Averages, RSI, or MACD. 7. **Practice Paper Trading:** Before risking real money, practice using OBV in a simulated trading environment.

OBV and Volume Analysis

OBV is inherently linked to volume analysis. High volume confirming a price move adds strength to the signal. Low volume during a price move suggests weakness. Consider these points:

• **Increasing Volume on a Rising OBV:** A strong signal of sustained buying pressure.
• **Decreasing Volume on a Rising OBV:** A weaker signal; the uptrend may not be reliable.
• **Increasing Volume on a Falling OBV:** A strong signal of sustained selling pressure.
• **Decreasing Volume on a Falling OBV:** A weaker signal; the downtrend may be losing momentum.

OBV vs. Volume Price Trend (VPT)

Both OBV and Volume Price Trend (VPT) aim to relate price and volume. Here's a quick comparison:

Feature	OBV	VPT
Calculation	Based on closing price changes	Uses the *percentage* change in price
Sensitivity	Less sensitive to price fluctuations	More sensitive to price fluctuations
Interpretation	Simpler to understand	Can provide earlier signals, but prone to more false signals

Limitations of OBV

• **Lagging Indicator:** OBV is a lagging indicator, meaning it confirms trends rather than predicting them.
• **Can Give False Signals:** Divergences can sometimes be misleading.
• **Not Suitable for Sideways Markets:** OBV is less reliable in sideways or choppy markets.
• **Doesn't Account for the Size of Price Changes:** OBV treats a small price increase the same as a large price increase.

Further Learning

• Candlestick Patterns
• Support and Resistance Levels
• Fibonacci Retracements
• Bollinger Bands
• Trading Strategies
• Risk Management
• Cryptocurrency Wallets
• Decentralized Exchanges (DEXs)
• Understanding Market Capitalization
• The Efficient Market Hypothesis
• Bybit Open account

Conclusion

On Balance Volume is a valuable tool for cryptocurrency traders to understand the relationship between price and volume. By learning to interpret OBV, you can gain insights into potential trend reversals and confirm the strength of existing trends. Remember to always combine OBV with other technical indicators and practice sound risk management principles.

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