On-Balance Volume (OBV) Definition
On-Balance Volume (OBV) is a specialized technical analysis tool that functions as a momentum indicator. It uses volume flow to anticipate price changes. Through the use of simple mathematical calculations, the OBV assigns a positive or negative value to trading volumes, which is then cumulated over a certain time period to provide a running total.
On-Balance Volume (OBV) Key Points
- OBV is a momentum indicator used in technical analysis.
- It operates on the principle that volume changes precede price changes.
- It assigns positive or negative values to trading volumes to calculate the balance.
- The indicator helps to predict potential market trends.
- It’s particularly useful in the crypto market where volatility is high and price swings can often be extreme.
What is On-Balance Volume (OBV)?
OBV is a unique initiative that was developed by Joseph Granville, a stock market analyst. This technical analysis tool works on the assumption that changes in volume trends are typically a precursor to price changes. Hence, it focuses on identifying when such changes may happen and links it to the asset’s trading volume.
Why is On-Balance Volume (OBV) important?
The importance of OBV lies in its ability to predict potential market trends. By using changes in trading volumes and correlating that with price movements, traders obtain valuable insight into the market’s likely direction. Such insight can help traders make informed trading decisions and potentially maximize trading profits.
When to use On-Balance Volume (OBV)?
As a technical analysis tool, OBV is primarily used when traders are studying historical trading data to anticipate future price movements. In particular, when markets exhibit strong volume changes, OBV provides an edge in accurately predicting the subsequent movement in prices.
Where does On-Balance Volume (OBV) apply?
OBV applicability is primarily in the financial marketplace, specifically where the trading of assets occurs. Although it was developed for the stock market, its principles are equally applicable to other asset classes such as commodities, forex, and significantly in the crypto market.
How does On-Balance Volume (OBV) work?
OBV operates by assigning a positive or negative value to an asset’s trading volume for each period under study, depending on if the asset closes higher or lower than the previous close. When the close is higher than the previous close, the volume is added to the previous OBV. If lower, the volume is subtracted. This creates a cumulative total, which forms a line that traders can use alongside price movements to identify trends.
