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On-Balance Volume
Next, we will learn about a volume-based indicator known as 'On Balance Volume.'(OBV)
What is On-Balance Volume?
Volume is one of the simple tools that work that helps to identify big moves in the stock market. Let us understand the importance of Volume and how to trade with it.
According to this theory, the volume is correlated with the change in price. On Balance Volume (OBV) actually measures buying and selling pressure on a cumulative basis which subtracts volume on down days and adds volume on up days.
1. If today's closing price is higher than yesterday's closing price, then: Current OBV = Previous OBV + today's volume
2. If today's closing price is lower than yesterday's closing price, then: Current OBV = Previous OBV - today's volume
3. If today's closing price equals yesterday's closing price, then: Current OBV = Previous OB
On Balance Volume was developed by Joe Granville and it is one of the first indicators to measure positive and negative volume flow. People often use OBV to confirm price trend and also look for divergence between price and OBV.
How to get an advanced trading signal using OBV?
On Balance Volume (OBV) actually measures buying and selling pressure on a cumulative basis which subtracts volume on down days and adds volume on up days.
CALCULATION
1. If the closing price is above the prior close price then: Current OBV = Previous OBV+ Current Volume
2. If the closing price is below the prior close price then: Current OBV= Previous OBV - Current Volume
3. If the closing prices equals the prior close price then: Current OBV= Previous OBV (no change)
How to trade using OBV?
ADVANCED BREAKOUT
This is a situation when the price could not breach the previous top, but OBV line has breached the previous top.
ADVANCED BREAKDOWN
This happens when the price has failed to break the previous bottom whereas On Balance Volume has broken the previous bottom.
