The On Balance Volume Indicator or OBV is an indicator which measures buying and selling pressure. It was developed by Joe Granville. This is introduced in Joe Granville 1963 book, Granville’s New Key to Stock Market Profits. It was one of the first indicators to measure positive and negative volume flow.
Description of On Balance Volume Indicator:
This OBV rises when the volume on up days is lower and falls when the volume on down days is stronger. In this indicator, a rising On Balance Volume reflects positive volume pressure that can lead to higher prices and a falling graph reflects negative volume pressure that can foreshadow lower prices. Expect prices to move higher (if this indicator is rising while prices are either flat or moving down) and move lower (if OBV is falling while prices are either flat or moving up).
Traders can find the On Balance Volume indicator inside the STUDIES section in the Zerodha Kite platform. You can attach it on any chart from there. Check the image below where we attached the OBV indicator on Reliance Industries shares price chart.
The absolute value of On Balance Volume indicator is not important. Technical analysts should better focus on the characteristics of the O.B.V indicator. These are – (a) define the trend for OBV, (b) determine if the current trend matches the trend for the underlying security, (c) look for potential support or resistance levels. In this, the trend for O.B.V will change and these breaks can be used to generate signals. Also, the O.B.V is based on closing prices. In On Balance Volume, the closing prices should be considered when looking for divergences or support/resistance breaks.
How this indicator work :
- In this indicator, when both price and indicator are making higher peaks, the upward trend is confirmed.
- In this indicator, when both price and indicator are making lower peaks, the downward trend is likely to continue.
- During a trading range, rising On Balance Volume indicates accumulation and hence chances of upward breakout.
- During a trading range, falling OBV indicates the distribution and hence chances of support breakdown.
- In On-Balance-Volume, the term of negative divergence is when price continues to make higher peaks and OBV fails to make higher peaks, then the upward trend is likely to stall or fail.
- In On-Balance-Volume, the term of positive divergence is when price continues to make lower troughs and OBV fails to make lower peaks, the downward trend is likely to stall or fail.
This is a simple indicator that uses volume and price to measure buying pressure and selling pressure. In this indicator, buying pressure is evident when positive volume exceeds negative volume and the OBV line rises and selling pressure is present when negative volume exceeds positive volume and the OBV line falls. Like all the other technical indicators, it is important to use the OBV in conjunction with other aspects of technical analysis. It is not a standalone indicator and thus should be used prudently.
Categories: Technical Indicators