OBV Indicator : Download FREE with video Guide ( MT4/MT5)
OBV is an MT5 indicator that helps traders to comprehend whether bulls are purchasing or bulls are vending in Metatrader 5. So, the on-balance volume simply estimates buying and selling pressures. The OBV indicator for MT4 was designed by Joe Granville in 1963 in his famous book “New Key to Stock Market Profits”.The logic behind the OBV concept was so simple. In this guide, i will explain all the details related to this indicator.
What is OBV Indicator ?
Many chartists believe that the On Balance Volume strategy should consider the change in the OBV volume to predict the timing of big moves. Consequently, they consider OBV changes as the main driving forces of the price. This is a logic volume analysis as it follows the basic offer and request law. In fact, important price moves often follow a sharp shift in trading volumes. To explain, when a lot of traders long an asset, trading volumes get higher. Hence, the price will probably increase next to this. Alternatively, shorting the asset heavily would diminish prices at some future instant. In short, the dynamic OBV volume influences the financial asset value.
- New highs in the OBV line show that bulls are stronger than bears. Hence, the price is likely to rise.
- New lows in the OBV oscillator reveal that sellers are more powerful than buyers. Thus, the price is likely to fall down.
- If the price and the OBV line oscillate altogether in the same direction, then the underlying move is confirmed.
- When the OBV move foregoes the price change, an OBV divergence phenomenon occurs.
Note that the numerical OBV value of the indicator is irrelevant. Yet, its variation and sloping are the relevant information.
How to trade with it ?
A positive correlation between the price and the volume is a forex confirmation signal of the currency movement. Consequently, the OBV indicator can assist traders to identify and confirm the price tendency. This OBV system specifies that increasing volumes would cause price booms and decreasing volumes would lead to price deterioration. So, when the OBV sloping matches the price direction, this confirms the move continuation. The EURUSD example below shows that the OBV line and the price are positively correlated. Thus FX traders could enter at any stage of the confirmed direction.
How to build a trading strategy with this indicator ?
OBV divergence strategy
A popular strategy stands for trading the OBV divergence compared to the price movement. To explain, this divergence occurs when the price direction is not confirmed by the OBV line. Hence, a potential reversion could emerge in the forex market. Note that the divergence of the OBV indicator could be bullish or bearish on stock and cryptocurrency charts. To explain, a bullish divergence transpires when the price activity produces a higher high but the OBV line produces a lower high. Conversely, a bearish divergence happens when the price leaves a lower low but OBV leaves a higher low.
Let us examine the upper GBPJPY chart. First, higher highs give an impression that the uptrend move would continue. However, the volume flow has shifted downward according to the balance volume indicator. In fact, the OBV indicator is making lower highs. Consequently, the bullish pressure may have diminished, and the bears may have taken control now. In other words, the market direction would reverse after this divergence. As we can see, it reversed downward towards the indicator direction. In short, this OBV divergence strategy utilizes the balance volume evolution to capture potential changes in the price direction.
OBV breakout strategy
The OBV indicator could differentiate between a fake breakout and a real one. To explain, the indicator confirms breakouts as follows:
- When the price breaks an upper level, then the asset must make an incremental volume at the same time.
- When the price cuts a downer level, then the instrument should lose its present volume.
In this example, there is a lower price level that is supporting the price rise. Considering the volume flow from the OBV indicator around this area, we discover that the OBV has confirmed the breakout of this area. Consequently, the market direction moved downward. In conclusion, one advantage of the balance volume is that it confirms the breakout before its realization. In the following EURAUD H4 chart, the price fell down next to a rising selling pressure and bears taking control over the market.
Moreover, this OBV breakout strategy could be applied to all cryptocurrency charts like bitcoin. To clarify, when cryptocurrencies are moving sideways for too long in a particular range, traders are likely to lose their attention. Yet, this indicator for MetaTrader can predict the next move using the later OBV breakout strategy.
The on balance volume indicator shows a blue OBV line in a separate MT4 window. Below, we attached the OBV to the USDJPY H4 chart. The OBV line marks bullish and bearish signals in the MetaTrader 4 platform. Also, it denotes changes in the prevailing trending direction. To explain, there are three different scenarios:
- The currency pair is ranging when the OBV line is relatively stable.
- An upside move of the indicator marks a bullish FX pair. Hence, forex traders may initiate a buy order.
- A downward indicator denotes a bearish move. Thus, chartists can open a sell trade.
Moreover, when the OBV indicator is weakening or inverts on your MT4 chart, the currency direction would reverse soon.
The OBV indicator is a useful Metatrader metric for gauging the buying and selling pressures among Forex investors. Also, many chartists think that these pressures often precede price changes. Which makes the indicator a perfect trading indicator. The basic trading rule is to follow the OBV direction to confirm the movement. However, OBV divergences could occur as possible reverses in the recent tendency. Consequently, traders must combine the indicator with other forex tools to get strong entry areas.