OBV Indicator: Tracking Market Dynamics
OBV indicator is an abbreviation of the English-language phrase On Balance Volume: it is usually translated into Russian as "balance volume."
Installation of the indicator
OBV belongs to the volume indicator group, so in order to load the corresponding window it is necessary to select from the top menu bar of the sales terminal:
Method of calculation of the indicator
OBV calculation is based on 2 main key figures:
Change in the price of the currency pair;
Volume of trades for a certain period of time.
Three options are possible within this algorithm:
OBVtech = OBVbefore Vtek: the closing price of the current day is higher than the price of the previous day. In this case, the OBV of the current day will be calculated as the OBV of the previous day plus the trading volume on the current day.
OBVtech = OBVpre: closing price of the current day = closing price of the previous day.
OBVtech = OBVpre-V: the closing price of the current day is higher than the previous one.
Installation of parameters of the indicator
To set up this indicator correctly, you need to understand its functionality.
The Options tab in the indicator menu allows you to:
to choose color;
Set the price type in OBV calculation.
By default, the closing price is used for the calculation. However, modern trading terminals, including Metatrader4, allow you to choose as a base for comparison:
weighted price of closing.
Use the Levels panel to set the line to an important value.
The Display panel allows you to select a time frame.
* By default, it appears on all timeframes.
Analysis of the indicator
When the uptrend is stable, each closed candle adds a trading volume value to the previous OBV value, making it more substantial.
As a result, you see on the chart that each new peak is higher than the previous peak.
In the case of a downward trend, the OBV value will drop rapidly. Each new peak in this situation will become lower than the previous one: the downtrend of the indicator.
The indicator trend is considered valid until it is broken: the downward trend will change to lateral or upward.
One of the most obvious ways to track this is to build trend lines exactly the same as you build on price charts.
Use of indicator on stable trend
One option to use the OBV indicator is to interpret it as a trend confirmation tool.
In this case, each new peak of the OBV indicator, in uptrend conditions, sends a signal to make a purchase transaction.
Similarly to downtrend: each new depression on the OBV chart signals a sale transaction.
Until the trend is reversed, focusing on a line of support or resistance, it is possible to accurately predict future peaks or depressions by using this forecast for trade.
Using the Indicator for Trend Reversal
Trend reversal situation is no less interesting material for using OBV indicator.
The 1st sign of the future trend reversal is the divergence of price and OBV schedules.
If initially they moved unidirectional, but then the price continued to rise, and the indicator slowed it down - look at the market.
If the indicator schedule has changed its direction to the opposite - expect a rapid fracture of the current trend.
The chart shows that there is a marked downtrend in the NZD/USD pair, but the OBV chart has an equally marked upward trend.
! When the indicator is pushed away from the support line, make a deal for purchase: in a couple of hours the market will confirm the correctness of your decision, and in three days on such a deal it will be possible to earn at least 170 points.
Bull divergence Forex is the situation on the chart, this (divergence) indicating the market 's transition to an uptrend.
Bear divergence is the opposite situation where divergence in the directions of price and OBV charts suggests a possible transition to a downtrend.
Advantages and disadvantages of OBV indicator
In summary, the OBV indicator has the following advantages:
Advance in relation to price;
presentation, convenient use;
Used at stable trend and at trend reversal;
Can be predicted using trend lines.
However, it is not devoid of some shortcomings:
Price breaks significantly distort the indicator schedule;
Does not take into account price movements within the selected timeframe, assigning a negative or positive sign to the entire trading volume.
Knowing this makes sense on days when there are significant price movements on the market either side or price breaks, take advantage of other tools, such as the Bollinger lane indicator. And in the rest of the time, the OBV indicator is a reliable assistant in the difficult business of conquering Forex.
If there is a steady trend on the price chart, the trader should make sure it moves in the direction of the price.