Forex technical traders have hundreds of indicators to choose from for analyzing and identifying the currency market trends. While most of the indicators have varying data they analyze and formulas, they all share one common feature, making it easier for the traders to interpret the market movements and trends.
Some of the most popular technical tools they use are momentum indicators that measure the price movement speed and rate of change of a currency pair. One of the most common momentum indicators in forex trading is the On Balance Volume indicator or OBV.
What Is On Balance Volume Indicator And How Does It Work?
On Balance Volume is a popular forex momentum-trading indicator developed by Joe Granville. The indicator primarily combines the price direction with volume to provide traders with real-time trend strength. OBV is an indicator or confirmation tool that gauges the potential of the trend following the same direction as its current one.
Traders using the On Balance Volume chart for the first time might assume that it is hard to read, but it is one of the most straightforward tools to learn and understand. The OBV line shows at the lower part of the chart, and this is how you interpret what you see.
On the off chance that the OBV line is rising, it implies that the volume on sure days is higher than the volume on regrettable days. The market is bullish.
Then again, if OBV displays a downward trend, it implies that the volume on adverse days is higher than the volume on certain days. As such, you can say the market is bearish.
Subsequently, numerous forex traders need to see that bullish patterns and a rising OBV value join, while bearish patterns join a falling On Balance Volume value. This indicates that the market influences, particularly the supposedly “clever money”, support current market trends. In short, the reasoning behind the OBV indicator is that price should stay very close to volume.
On Balance Volume Calculation Formula
The formula of OBV acts in total in that it continually adds or eliminates the volume of the current chart from the total OBV value.
On the off chance that the end of this bar is higher (more prominent) than the end of the past bar, at that point: OBV= OBV of the past bar + volume of the current bar (Today’s Volume)
On the off chance that the end of this bar is lower (not precisely) the end of the past bar, at that point: OBV=OBV of the past bar – the volume of the current bar (Today’s Volume)
If the present close is equivalent to the end of the earlier day, at that point: Current OBV Reading = Previous OBV
Trading Strategies You Can Build With On Balance Volume
Even though you can use OBV alone without the need for other strategies or indicators, utilizing others makes it stronger. Some of the most common and popular strategies that you can use to build this indicator are as follows-
- Breakouts
- Moving Average Crossover
- Keltner Channel Day Trading/Swing
- Relative Strength Index (RSI)
Pros and Cons of On Balance Volume
Pros
- It is one of the leading volume indicators and one of the easiest to use even for novices
- Time-tested, the indicator works well in all markets, including forex, futures, cryptocurrencies, equities, and fixed-income
- Many of the forex traders consider OBV to be among the best volume-based indicator to complement other trading strategies
Cons
- If used on shorter timeframes, the OBV indicator offers misleading signals
- The indicator lacks all the data needed for price action foolproof analysis. Therefore, it is essential to use it with other trading strategies for the conclusive volume analysis.
- It generates too much noise making it inappropriate for scaling
- It is prone to manipulation through the generation of fake orders cancelled before execution. A spike in volume can throw off the indicator.
Conclusion
OBV is a popular indicator that works well in both high and low volume markets. However, during the market volatile days, using the OBV indicator on its own might not be enough as it can lead to many false signals. You can strengthen it by using some of the other most potent trading strategies for profitable opportunities.