On balance volume is a kind of momentum indicator .
on balance volume indicator was created by Joseph Granville with the main objective of using the volume flow to indicate the changes in the market price.
According to Joseph Granville, he considers on balance volume indicator to be based on divergence and trend line strategy.
Based on trend line strategy,the on balance volume will be considered to be rising if the price is also rising and be falling if the price is also falling.
According to Joseph Granville, the values of on balance volume is calculated using the following formula;
- If the current close price is higher than the previous one,then the current volume will be added to the previous one thus giving the formula as;
current period(OBV)=previous period(OBV) +current Volume
- if the current close price is lower than the previous one,then the current volume will be subtracted from the previous one thus giving the formula as;
current period(OBV)= previous period(OBV)- current Volume.
Therefore,on the basis of divergence,when the price of the market is moving downwards when the On Balance Volume(OBV) is rising,then the market will be considered to be a bullish market thus the traders should close any sell position and open a buy position since the market will reverse and start moving upwards while when the market is moving upwards when the On Balance Volume (OBV) is falling,then the market will be considered to be a bearish market thus the traders should close any buy position and enter a sell position since the market will reverse and start moving downwards.This is indicated from the candle sticks chart below;
From the candlesticks chart above,there is point A,B and C.Point C is representing the OBV curve while point A and B is representing the upwards and downwards OBV movement.
At point A,the market was initially moving downwards while the OBV curve was rising.This results to an upward market reversal thus signaling the traders to close any sell position at that point and open a buy position because the market was becoming a bullish market.At point B,the market was initially moving upwards while the OBV curve was moving downwards.This resulted to a downward market reversal thus signaling the traders to close any buy position and open a sell position since the market was becoming a bearish market.
Recommendation:If you are a day trader just use 1 min,5 min,15 min and 30 min time frame while if you are a swing trader just use 1 hour and above if you want On Balance Volume trading indicator to work well for you.
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