The OBV indicator (On Balance Volume) is a technical analysis indicator used to measure the total trading volume of an asset. The indicator was developed by Joseph Granville and is used to determine the ratio between buying and selling pressure in the market.
How does OBV work?
The OBV indicator works on the principle that an increase in trading volume is often a precursor to a rising price, while a decrease in trading volume is often a precursor to a falling price. This is because increasing trading volume is often seen as a sign that more traders are willing to buy or sell, which can lead to a price change.
How is the OBV indicator calculated?
To calculate the OBV indicator, the current trading volume is compared with the previous trading volume. If the current trading volume is higher than the previous trading volume, the difference is added to the total OBV value. If the current trading volume is lower than the previous trading volume, the difference is subtracted from the total OBV value. This process continues for each period in the data being analysed.
How do I interpret OBV on my charts?
The OBV indicator can be displayed on a chart, where the OBV value is shown as a line that rises or falls depending on the ratio between buying and selling pressure in the market. A rising line can be seen as a sign of increasing buying pressure, while a falling line can be seen as a sign of increasing selling pressure.
In conclusion
The OBV indicator can be used in combination with other technical analysis indicators to help investors determine the right time to enter or exit an investment. However, it is important to remember that the OBV indicator has no predictive value and can only be used as a tool to assist in analysing the market.