On balance volume

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

Welcome to the world of cryptocurrency trading! It can seem overwhelming at first, but don't worry. This guide will break down a useful tool called On Balance Volume (OBV). It's a technical indicator that helps us understand if money is flowing *into* or *out of* a cryptocurrency. Think of it as a way to see if traders are agreeing with the price movement.

What is On Balance Volume?

On Balance Volume (OBV) was developed by Joe Granville in the 1980s. It’s a momentum indicator that relates price and volume. The core idea is simple: volume precedes price. Meaning, a significant increase in trading volume *before* a price move can signal that move is likely to continue.

The OBV doesn't tell you *what* the price will do, but rather *if* the current trend is likely to continue. It does this by accumulating volume on up days and subtracting volume on down days.

Let's break that down.

• **Up Day:** When the price closes higher than the previous day's closing price.
• **Down Day:** When the price closes lower than the previous day's closing price.
• **Volume:** The number of units of a cryptocurrency traded in a given period (usually one day). You can learn more about trading volume here.

OBV adds the day’s volume to a running total when the price goes up, and subtracts the day’s volume when the price goes down. The resulting number is the OBV.

How to Calculate OBV (and why you probably won't)

While understanding the concept is important, you almost never calculate OBV by hand. Your trading platform (like Register now, Start trading, Join BingX, Open account or BitMEX) does it for you. But for clarity, here's the formula:

OBV = Previous OBV + Today's Volume if price went up OBV = Previous OBV - Today's Volume if price went down

Let's look at an example:

| Day | Price | Volume | OBV Calculation | OBV | |---|---|---|---|---| | 1 | $10 | 100 | Initial OBV | 100 | | 2 | $12 | 150 | 100 + 150 | 250 | | 3 | $11 | 80 | 250 - 80 | 170 | | 4 | $13 | 200 | 170 + 200 | 370 | | 5 | $12 | 120 | 370 - 120 | 250 |

As you can see, the OBV rises when the price goes up and falls when the price goes down.

Interpreting OBV: What Does it Tell Us?

Here's how to interpret the OBV line:

• **OBV Rising:** If the OBV is rising, it suggests that buying pressure is strong. More volume is occurring on up days, indicating that traders are optimistic about the asset.
• **OBV Falling:** If the OBV is falling, it suggests that selling pressure is strong. More volume is occurring on down days, indicating that traders are pessimistic.
• **OBV Divergence:** This is where things get interesting. Divergence happens when the price and OBV move in opposite directions.

   * **Bullish Divergence:**  Price makes lower lows, but OBV makes higher lows. This *could* signal a potential price reversal to the upside.  It means selling volume is decreasing even as the price falls.
   * **Bearish Divergence:** Price makes higher highs, but OBV makes lower highs. This *could* signal a potential price reversal to the downside. It means buying volume is decreasing even as the price rises.

• **OBV Confirmation:** If the price and OBV are moving in the same direction, it confirms the current trend. For example, if the price is rising *and* the OBV is rising, it strengthens the bullish case.

OBV and Other Technical Indicators

OBV works best when used in conjunction with other technical analysis tools. Here’s how it compares to a few:

What it Shows | How it Complements OBV |
Moving Averages | The average price over a period of time. | Confirms trend direction. OBV can signal strength *within* the trend identified by moving averages. |	Relative Strength Index (RSI) | Momentum oscillator showing overbought/oversold conditions. | OBV can confirm RSI signals. For example, if RSI shows oversold and OBV is rising, it’s a stronger buy signal. |	MACD | Trend-following momentum indicator. | Similar to RSI, OBV can confirm MACD crossovers and divergences. |

Practical Steps for Using OBV

1. **Find OBV on your Chart:** Most crypto exchanges and charting platforms have OBV built in. Look for it in the indicators section. 2. **Look for Divergences:** Pay close attention to situations where the price and OBV are moving in opposite directions (bullish or bearish divergence). These can be early warning signs of a trend change. 3. **Confirm with Volume:** Always look at the actual volume alongside the OBV. High volume during OBV movements adds more weight to the signal. 4. **Don’t Use it in Isolation:** OBV is not a foolproof indicator. Use it with other technical analysis tools like Fibonacci retracements and candlestick patterns to increase your chances of success. 5. **Practice on a demo account**: Before risking real money, practice using OBV on a demo account to get comfortable with its interpretation.

Limitations of OBV

• **Lagging Indicator:** OBV is a lagging indicator, meaning it confirms trends *after* they have already started.
• **False Signals:** Divergences can sometimes be false signals.
• **Not Suitable for Sideways Markets:** OBV can be less reliable in sideways or ranging markets where there's no clear trend.
• **Weighting:** OBV treats all volume the same, regardless of the size of the trades. Volume Price Trend (VPT) attempts to address this limitation.

Further Learning

• Candlestick Patterns
• Support and Resistance
• Trend Lines
• Trading Strategies
• Risk Management
• Day Trading
• Swing Trading
• Scalping
• Position Trading
• Elliott Wave Theory
• Ichimoku Cloud
• Bollinger Bands

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