On Balance Volume (OBV) – is the indicator applied in Forex technical analysis. This indicator was firstly described by Joseph E. Granville in 1963 in his book “New Key to Stock Market Profits” . The author applied on balance volume indicator for commodity market analysis, because considered volume figure to be a key driving force. The main point is the possibility to forecast change of price on the basis of changing trading volume. Although at present the indicator “On Balance Volume” has a widespread application for analysis of the Forex market.
Measurement of Balance Volume
The indicator is measured as a cumulative moving average of trading volume. On growing market this indicator has a positive value and on declining market its value is negative. Thus, with growing market value of indicator grows and it falls down when prices decline.
Application of Balance Volume Indicator
The indicator of Balance Volume is an anticipating figure. This is related to that under big investments made by large players of the Forex markets smaller investors continue sales and the price changes with a delay. Therefore, such change is not seen on candle chart at once, though volume indicator allows to visualize that. Further large players close their long positions with big volumes at the price beneficial for them that again tells about a soon sharp decline of price.
Thus, OBV points out main moments of Forex trend's reversal.
However, the indicator cannot be used on its own as the only sign of clear Forex signals used to enter or leave market. On balance volume indicator requires to be confirmed by other indicators.
Main rules of the Balance Volume Indicator:
- If the line of OBV indicator grows with the growth of price, it confirms ascending trend (watch pic. 1).
- If the indicator's line declines following to drop down of the price, it shows confirmation of descending trend.
- Decline of OBV line under growth of price or its growth when price falls down, divergence occurs telling about a soon change of trend (watch pic. 1).
- As a rule, the indicator is used for large time frames: hour, 4-hours', daily, weekly, etc.
Picture 1. On Balance Volume indicator, ascending trend
Picture 2 On Balance Volume indicator, divergence