Started by RoboForex, Jan 31, 2022, 07:04 am
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This article is devoted to using the On Balance Volume indicator. It connects changes of the price of a financial instrument with the trade volume.
The On Balance Volume (OBV) indicator demonstrates price fluctuations in accordance with changes in the trade volume over a certain time. The indicator was devised in the 1960s by an investor and financial analyst Joseph Granville and remains up-to-date still.
OBV is quite a simple yet efficient indicator. It does not use averaging, hence it has no lag. The indicator is based on the theory that any serious change in the trade volume can provoke a price surge. The author of the indicator compared volume to the steam that pushed forward a steam train.
OBV is represented in a separate window under the price chart as the main calculation line. The dynamics of the line shows whether trade volumes confirm the current market trend. OBV is pre-installed on most trading platforms, including MetaTrader 4 and MetaTrader 5.
To install OBV on the chart of your instrument on MetaTrader4 or MetaTrader 5, click Main Menu/Insert/Indicators/Volumes/On Balance Volume.
Calculation formulas are as follows:
OBV = OBV (n-1) + Volume
OBV = OBV (n-1) - Volume
OBV = OBV (n-1)
In the formulas:
Note that most useful is the real trade volume in the stock and commodity markets. In Forex, we use the so-called "tick volume", which is quite relative but still can be used for trading.
When installing OBV, you can alter the following parameters in the settings window:
Trading with OBV requires larger timeframes (H1 and higher) and two main signals -- trend confirmation and a divergence of the indicator line and the price chart.
When forming highs on the chart get confirmed by equally growing highs of the indicator, this means there is a stable uptrend. And vice versa: when new price lows on the chart get confirmed by the renewing lows of the indicator line, the current downtrend is strong.
For trading, you can use important support/resistance levels:
A divergence appears when the extremes of the indicator and the price chart do not coincide.
The On Balance Volume indicator bounds the price dynamics of the asset to trade volumes. Large volumes normally precede strong market movements. Apart from a general assessment of the market, OBV confirms trading signals by the trend and shows where the price might start reversing if there is a divergence. Before using the indicator for real, practice on a demo account.
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