What is On Balance Volume (OBV)?
On-Balance Volume is a metric that has been around since the ‘60s and follows one simple thesis point: volume precedes price. Created by Joseph Granville, it predicts an increase or decrease in the price of an asset by measuring the flow of that asset’s volume, by predicting pressure being exerted by buyers and sellers through the changes in asset volume and price. The basic theory is that, when there is a sudden and unexplained increase in volume of an asset without a corresponding increase in price, the price is likely to increase dramatically in the near future. Similarly, according to the theory, a sudden decrease in volume without a corresponding change in price is likely to lead to a sudden decrease in price.
The OBV metric is based on the simple distinction between knowledgeable professional investors and those who invest recreationally. This is what is known as a whale indicator, as it serves as an indication that there is considerable movement occurring with money coming in (out) of an asset. It is most often used as a means of confirmation or identification for overall price trends and to predict market movement after divergence of a currency.
How does On Balance Volume Work?
On Balance Volume is a daily tally of the volume of an asset, in total (i.e. both positive and negative volume). The OBV is plotted day by day as a line graph, in order to make it easy to interpret where the Volume of your particular crypto-currency is heading, in order to assist you in your trading decisions. The basic principle is that when volume on up days is bigger than volume on down days, your OBV will increase, and vice versa. When calculating the On Balance Volume, three rules must be applied. These are:
- When today’s closing price is HIGHER than the closing price of the day before, current OBV = Previous OBV + today’s volume
- When today’s closing price is LOWER than the closing price from the day before, then current OBV = Previous OBV – today’s volume
- When today’s closing price is the same as it was the day before, then the current OBV = Previous OBV
Using On Balance Volume
Most cypto-currency trading platforms provide access to an OBV indicator, including Tradingview and MT4. Analysing the data provided by an OBV indicator is simple. If the price of BTC or any other cryptocurrency you are analysing is trading positively, but the trajectory of the OBV is negative, this is a likely indication that the purchasing public are selling into the price spike, meaning that the spike is likely not sustainable. Similarly, if your cryptocurrency is trading down, but the trajectory of the OBV is positive, you can expect an uptick in the price of your cryptocurrency.
It is important to remember that OBV is just one metric and shouldn’t relied on in isolation. Instead, it is a very useful way of confirming market trends, in conjunction with other signals or analytical models.