Good day steemians, This is season 5 week 4 and I'll be doing the advanced task assigned by crypto professor @fredquantum
Homework tasks
1. In your own words, explain your understanding of On-Balance Volume (OBV) Indicator.Using any charting platform of choice, add On-Balance-Volume on the crypto chart. (Screenshots required).
What are the Formulas and Rules for calculating On-Balance Indicator? Give an illustrative example.
What is Trend Confirmation using On-Balance Volume Indicator? Show it on the crypto charts in both bullish and bearish directions. (Screenshots required).
What's your understanding of Breakout Confirmation with On-Balance Volume Indicator? Show it on crypto charts, both bullish and bearish breakouts (Screenshots required).
Explain Advanced Breakout with On-Balance Volume Indicator. Show it on crypto charts for both bullish and bearish. (Screenshots required).
Explain Bullish Divergence and Bearish Divergence with On-Balance Volume Indicator. Show both on charts. (Screenshots required).
Confirm a clear trend using the OBV indicator and combine another indicator of choice with it. Use the market structure to place at least two trades (one buy and one sell) through a demo account with proper trade management. (Screenshots required).
What are the advantages and disadvantages of On-Balance Volume Indicator?
image designed by me in canva
1. In your own words, explain your understanding of On-Balance Volume (OBV) Indicator.
The On-Balance Volume indicator is a technical indicator first developed by Joseph Granvile to predict changes in market price. It was first documented in a publication titled "New key to stock markets" in 1963 and according to the creator, it was believed that the key force behind market moves was volume, therefore, based on this belief, the indicator was created to predict changes in market price.
The indicator helps to accurately predict big moves in the market due to rapid changes by measuring buying and selling pressures in the market.
The on-balance indicator is a cumulative indicator as the values it presents are gotten from adjusting for every increase and decrease in volume. This means, in a scenario where there's a price drop, the volume is subtracted and likewise in a situation where there is an increase in price the volume is added. A third scenario where a state of equilibrium persists ( no increase or decrease, then the volume remains stable).
The On balance indicator can give off either positive or negative values depending on the state of the market. Positive values are recorded whenever the current price of the market exceeds the closing price for the previous day and likewise, negative values are recorded whenever the current price of the market is below yesterday's closing price. When using the On balance indicator, traders pay more attention to the slope and nature of the line it plots rather than on the numerical value.
2. Using any charting platform of choice, add On-Balance Volume on the crypto chart.
I'll be making use of the trading view charting software for this task.
To add the On-balance indicator to chart using trading view
- I launched the app
image gotten from trading view
- I clicked on charts to select a trading pair of my choice (I've selected the AAVE/USDT pair)
- I located the group marked fx indicator and clicked on it
image gotten from trading view
- On the next interface, I searched On balance volume in the search bar and clicked on it to incorporate the indicator to chart.
image gotten from trading view
indicator added to chart
image gotten from trading view
3. What are the Formulas and Rules for calculating On-Balance Indicator? Give an illustrative example.
In deriving the calculation for the On Balance indicator, the relationship between the closing price and trading volume of two consecutive days is taken into cognizance.
The formula for calculating the OBV indicator is given as follows:
OBV = OBVprev ± trading volume
From the model above;
- In a situation when today's closing price is higher than that of yesterday then the previous OBV is added to the trading volume.
- In a situation when today's closing price is less than that of yesterday then the previous OBV is subtracted from the trading volume.
- If today's closing price is the same as yesterday's, then current OBV equals previous OBV.
OBV= prev OBV
An example using seven days' worth closing price and trading volume Information of a crypto asset is given below.
| DAYS | ClOSING PRICE | TRADING VOLUME |
|---|---|---|
| 1 | $30 | 30000 |
| 2 | $35 | 35500 |
| 3 | $33 | 33000 |
| 4 | $36 | 37000 |
| 5 | $36 | 38000 |
| 6 | $30 | 32000 |
The calculation of the OBV values will be :
- Day 1 OBV = 0
- Day 2 OBV = 0 + 35,500= 35500
- Day 3 OBV = 35,000 - 33000 = 2000
- Day 4 OBV = 2000 + 37,000 = 39,000
- Day 5 OBV = 39,000
- Day 6 OBV = 39,000 - 32,000 = 7,000
From the above calculations, it's observed that the volume for day 2 and day 4 was added up. This is because the closing price of the day is higher than that of the previous day. Also, the volume for day 3 and day 6 was subtracted because the closing price of the day was less than that of the previous day.
The OBV values for day 5 are also the same for day 4 because according to the model documented above, whenever the day's closing price equals the previous close price the current OBV equals the previous OBV.
4. What is Trend Confirmation using On-Balance-Volume Indicator? Show it on the crypto charts in both bullish and bearish
Trend confirmation is one major aspect the OBV indicator plays out excellently. The OBV indicator helps in the identification of a price trend. One simple way to confirm a trend is to verify if there's a positive correlation between price and volume, once a positive correlation can be established using the OBV indicator, then the existing trend is confirmed.
Bullish Trend
We've put forward the point that for a trend to be confirmed in the market there has to be a positive correlation between price and the volume reported by the OBV. This means that in a bullish trend, as price keep making higher highs and higher lows so also does the OBV indicator. An example is given in the BTC/USDT chart pair below.
Bullish trend confirmation with OBV Indicator
Bearish Trend
Similarly, in a downtrend, we tend to see price show declining movements. For the bearish trend to be confirmed, the OBV would also slope downwards indicating lower lows and lower highs, signaling a continued downtrend structure. An example is given in the BTC/USDT chart pair below.
Bearish trend confirmation with OBV indicator
5. What's your understanding of Breakout Confirmation with On-Balance Volume Indicator? Show it on crypto charts, both bullish and bearish breakouts
The On balance indicator can also be utilized in a range or consolidation market whereby price bounces within the confinement of a zone. A consolidation is referred to as an accumulation phase whereby price gathers momentum in preparation for a trend. A Breakout usually follows after a consolidation and the OBV indicator serves as a good breakout confirmation indicator as a result of the trade volume it displays.
Bearish breakout confirmation
in the DOT/USDT pair below. the market had been consolidating for a while as the price moves within an area and the same ranging movement was also seen on the OBV indicator indicating that price movement and volume correlate. After some time, price broke below this zone on the charts and a downtrend began. This movement was also validated by the OBV indicator as its observed that it also broke below the marked area confirming the downtrend. This shows how the OBV indicator coupled with price action can help traders in trading breakouts and breakout confirmation.
Breakout confirmation with OBV
Bullish breakout confirmation
The SAND/USDT pair below shows the OBV also being put to place in a bullish breakout situation.
breakout confirmation with OBV
In the chart pair, the market initially was in a phase of consolidation. It happened to be moving and reacting towards certain resistance levels as confirmed by the OBV. It's observed that the movement of price and that of the indicator was synonymous during the consolidation phase. However, In the long run, the price of the asset broke the resistance above and continued into an uptrend. The breakout is confirmed when the OBV also breaks out of the marked zone to the upside, displaying an increase in volume.
This, therefore, confirms the authenticity of the OBV indicator in trading either bullish or bearish breakouts.
6. Explain Advanced Breakout with On-Balance Volume Indicator. Show it on crypto charts for both bullish and bearish.
Another use of the On Balance indicator is in advanced breakout. With the use of the OBV indicator traders can spot a signal of a price breakout before it happens. Here, we tend to see the OBV Indicator break a previous low or high before price action does after a consolidation.
Bullish advanced breakouts
In a bullish advanced breakout using the OBV Indicator. We tend to see the OBV Indicator break a previous high before price action does after a consolidation. This signifies that large volumes have been injected into the market to push price higher and the use of the OBV Indicator can help traders spot this early.
An example of the bullish advanced breakout is given in the BNB/USDT chart pair below. At first, there exist initial bearish pressures in the market which eventually spiraled into a consolidation phase, a state of no clearly defined trend.
bullish advanced breakout with OBV
Price continued to range between some zones and the OBV indicator does its best to indicate the presence of consolidation in the market also as volume reported also vacillates in these zones. Some fake breakouts were also spotted and with the use of the OBV Indicator, these breakouts would have been easily avoided as a break of market structure should be followed by an increased volume but during the fakeouts, the OBV values remained stable.
The OBV previous high was broken at a point where the price hadn't broken its previous high and the advanced breakout was spotted early enough in this example as seen where price continued pushing upwards after the breakout was spotted.
bearish advanced breakout with OBV
In the bearish advanced breakout scenario, the OBV breaks below a previous low after a consolidation before price does. This indicates a reduction of volume in the market and indicates a bearish movement.
An example is illustrated in the BTC/USDT pair below
Bearish advanced breakout with OBV indicator
it's observed that both the OBV and price were consolidating initially, then OBV breaks below the zone at a point when price hadn't broken the previous low. This advanced breakout was given off by the OBV indicator first and with this, traders can have a solid viewpoint on the direction of the market.
7. Explain Bullish Divergence and Bearish Divergence with On-Balance Volume Indicator. Show both on charts
Divergence is simply a situation that occurs when the price of an asset moves in the opposite direction of a technical indicator.
Bullish divergence using the On Balance Indicator
Bullish divergence when using the On balance indicator occurs when the price of an asset in a bullish market continues to record lower highs but the on balance indicator on the other hand gives off a contradictory report of higher highs in the same period/session. This is often an indication that the bearish pressure is almost exhausted and the buyers are about to take over or the trend is about to change.
An example of bullish divergence using the On balance indicator is given in the BNB/USDT chart pair below.
Bullish divergence with OBV indicator
Here we observe the market was creating a downtrend pattern but OBV on the other hand gave off a series of higher high pattern indicating increased volume in the market. This signifies bears exhaustion and a potential move to the upside.
Bearish divergence using the On balance Indicator
Bearish divergence when using the On balance indicator occurs when price continues to give off bullish conditions with the records of higher highs while the On Balance indicator reports a lower high(downtrend pattern) in the same period/session. This is an indication that the bullish pressure is almost exhausted and the sellers are about to take over.
An example of this market condition is given in the BNB/USDT chart pair below.
In the pair shown above, the initial high on the price of the asset was marked on the chart as well as the On Balance Indicator. Following the asset price closely, the price broke the high and created an higher high while the OBV indicator failed to break above the previous high that was initially marked, rather a lower high pattern was formed on the OBV. This is a bearish divergence and traders in market can use this formation to anticipate and prepare for a change in the existing market trend as observed in the chart pair above where the market changed its trend briefly to a downtrend after the divergence was spotted.
The OBV is particularly helpful in such scenarios. Observing the discrepancies between the price and the OBV readings. If price is isolated, a trader might have the belief the existing trend still persists but with the use of the OBV indicator traders can be informed of a change in trend early enough.
8. Confirm a clear trend using the OBV indicator and combine another indicator of choice with it. Use the market structure to place at least two trades (one buy and one sell) through a demo account with proper trade management.
For this task, I'll pair the OBV indicator with the bollinger bands to analyze and take trades.
BNB/USDT Buy trade using OBV plus Bollinger bands
From the chart below, we observe price has been in a bullish phase as higher high formations have been maintained on chart and these movement has been confirmed by the OBV indicator.
Buy trade using the OBV plus bollinger bands
Furthermore, price has retraced towards the lower bands of the Bollinger bands and this movement has been confirmed by the OBV therefore a buy trade was open with risk: reward of 1:1.3 with stop loss placed below the previous low
Proof of trade place using binance
- Sell trade using the OBV indicator plus bollinger bands
In the chart, we notice a initial consolidation at first, after some time the OBV indicator broke out of its consolidation while price still remained in it. As explained by the professor, this is an example of an advanced breakout. A sell trade was placed using a risk/reward ratio of 1.
Here is the trade history confirming the live trade entry placed yesterday using trading view paper trading.
sell trade placed using the OBV indicator and the bollinger bands
9. What are the advantages and disadvantages of On-Balance Volume Indicator?
- OBV indicator is suitable for different types of trading
- Its quite simple and easy to grasp, even for beginners.
- It's one of the best volume complementary indicators out there.
One disadvantage of the on balance indicator is that it's a leading indicator and as such it may produce a lot of predictions on the market.
The OBV doesn't account for degree of price movements as the same volumes is added or subtracted regardless of price movements.
It sometimes produces false signals
The indicator can be thrown off by a large spike in volume in a single day.
Conclusion
The OBV indicator by Joseph Granvile is another brilliant indicator for analyzing the market, especially when paired with another indicator for confirmation. This basic technical analysis tool helps readers generate buy and sell signals and discover breakouts early enough. The crypto professor has done an excellent job of explaining the use of this indicator in a simple way. Thanks to the steemit team for the crypto academy, It's done far much in helping me tackle the markets one indicator/strategy at a time.