In my previous post I talked about volume in forex. Now I will talk about a volume based indicator. I just learn about this indicator not long ago. This is because I noticed that all the indicators I use are price-based. It’s time to pick up some volume based indicator to add in my tool box too. On Balance Volume (OBV) is developed long time ago, in year 1963 to show the money flow in and out in the market.
Volume is quite important in technical analysis. The volume is calculated in ticks movement in forex. But volume only shows increasing or decreasing on the change of ticks. OBV somehow gives direction to the volume. This will show buying or selling pressure.
The On Balance Volume Indicator
Calculation
OBV is calculated with the volume and price. OBV starts with 0. When a price is close higher, the volume of that bar is added into OBV. When the price closes lower, the volume is subtracted. Thus the number values in OBV have no significant meaning. What’s more important is the chart pattern and direction of OBV.
Healthy trend / Unhealthy trend
When uptrend occurs, a rising in OBV chart will shows that the trend is strong. This is because there are more volume that support the uptrend. When a downtrend occurs, a downtrend in OBV chart will show that the trend is strong.
Trading OBV trend-line
Trend line can be drawn on OBV, the same way that they are drawn in price chart. Traders look at OBV trend line because they believe in the concept “volume precede price”. Short and long signal are trigger once the trend line are broken. This is the same method use in trend line trading, once of the simplest form of trading.
Divergence
Divergence in OBV shows the trend is weakening. This is same method use when looking at other indicators.
