Hello Steemians, it is yet another week in the Steemit Crypto Academy season 5. I wish to appreciate the academy for its efforts towards ensuring that activities and learning are maintained at the highest standard. In today's lesson given by professor @fredqauntum, we were introduced to On-Balance Volume Indicator (OBV). The need to expand our knowledge in technical analysis is essential in making the best trading decision in the crypto market.
Let's get down to understanding how to utilise this indicator in our trading journey.
On-Balance Volume Indicator
Indicators are important technical analysis tools that the majority of traders rely on for good trading decisions. This indicator provides trading signals to traders or as a confirmation tool. The OBV indicator is a momentum-based indicator that measures the inflow of buy and sell pressures in the price of an asset. This indicator was first developed by Joseph Granville in the year 1963. Granville believed that studying and understanding the inflow of volume is a major step towards understanding the movement of institutional investors( the big players).
The OBV indicator measures the buying and selling pressure as this has a direct effect on the volume of assets traded on the asset. The previous days' volume and current day volume close are taken into account to determine and predict future/current market reactions.
Let's look at the OBV indicator is added on the chart.
Adding OBV Indicator on the Chart
In this section, I will be explaining how to add the OBV indicator on Tradingview.
The steps are as follows:
- On the chart interface, click on the indicator icon on the top menu of the page as shown in the screenshot below.
- After that, the indicator page pops up. Search for OBV indicator using the search box and click on it to add the indicator on the chart.
OBV Calculation
Indicators are gotten through mathematical models from price data points like the closing price, opening price, daily high and lows of price etc. The OBV calculates the total volume of an asset and determines the inflow of volume by using the closing day price (previous/present).
Let's identify some models;
OBV = Previous Days OBV + Current Day volume
- The above is valid if the current day close is greater than the previous days close.
OBV = Previous Days OBV - Current Day volume - This is valid if the current day close is lesser than the previous day close.
OBV = Previous Days OBV - This is valid if the current day close is equal to the previous days OBV.
Let's give an example of the 5-day closing Price of a crypto asset and the volume.
- Day 1: Closing price = $25, Volume = 40,000
- Day 2: Closing price = $26, Volume = 45,000
- Days 3: Closing price = $25.5, Volume = 42,000
- Day 4: Closing price = $26.5, Volume = 45,000
- Day 5: Closing Price = $26.5, Volume = 47,000
Now calculating the OBV for the data above, we have.
- Day 1 OBV = 0
- Day 2 OBV = 0 + 45,000 = 45,000
- Day 3 OBV = 45,000 - 42,000 = 3000
- Day 4 OBV = 3000 + 45,000 = 48,000
- Day 5 OBV = 48,000
From the above calculation, we can see that we added the volume for day 2 and day 4 because the closing price is higher than the previous day closing price. Also, we subtracted in day 3 because the closing price was lower than the previous day. Furthermore, day 5 is the same as day 4 because the closing price is equal to the previous day closing price.
Trend Confirmation Using On-Balance Volume Indicator
Understanding trends in the market is very important for every trader. Trends are basic signals a trader look out for before making any trading decision. Identifying trends will help you make entry decisions in the direction of the trend. Similarly, it will also give you the signal when a trend is weak and a reversal is about to happen.
In this section, we will be looking at how to confirm trends using the OBV indicator.
Bullish Trend
We have established that the OBV indicator line is influenced by the volume of buying and selling pressures in the market. During a strong trending market, we tend to see the OBV line making consecutive higher highs and higher lows formation. This shows that the trend is bullish and the market is likely to continue further in the upward direction. An example can be seen in the chart below.
Bearish Trend
Similarly, for a downtrend confirmation, we tend to see the OBV line declining showing lower lows and lower highs. This signal a bearish trend confirmation and also an indication that price will continue going down. An example can be seen in the chart below.
Break-out Confirmation with On-Balance Indicator
Break-out always occurs in the market after price has consolidated for some time. This phase is known as an accumulation phase for price to gather momentum before trending. During this phase, we tend to see price bounce off support and resistance areas before breaking out to either the upside or the downside.
The OBV indicator can play an important role in confirming price breakouts as the price movement is accompanied by the volume injected into the market. From the chart below, we can see price consolidating within the support and resistance area.
Also, looking at the OBV indicator, we can see the line consolidating which confirms the evolution of price with volume. After some time, we can see a price breakout to the upside. The OBV also reacted to this break by increasing upward which shows high buying pressure injected in the market.
Furthermore, the chart below shows a breakout to the downside after price consolidation. From the chart, we can see how the OBV reacted to this breakout declining to the downside. The OBV indicator confirms the breakout to the downside which shows a decreasing volume and lack of interest in the price of the asset.
Advanced Break-out with On-Balance Indicator
In the previous section, we have explained how to confirm breakout using the OBV indicator. In this section, we will discuss an advanced breakout confirmation using the OBV indicator. During a ranging market, price breakout either to the upside or the downside. But we tend to see the OBV indicator break a previous high while price hasn't broken a previous high. This is an indication that high volumes have been injected into the market to break price previous high. An example can be seen in the chart below.
Similarly, for a bearish advanced breakout, price fails to break a previous low as the OBV indicator has broken a previous low after consolidation. The breakout of the OBV indicates volume reduction to keep pushing price down to break the previous low.
The advanced breakout can be utilised by traders to foresee and take advantage of price breakouts before they occur. An example can be seen in the chart below.
Bullish and Bearish Divergence Using On-Balance Indicator
Divergences are important to technical analysis tools to detect possible trend reversals and trend exhaustion using an indicator and price action. The OBV is not an emotion as this indicator can be combined with price action to detect divergences. When the price is indicating a bullish structure by forming higher high patterns, the OBV indicator is forming a lower low pattern. The lower low formation of the OBV indicator shows declining volume which signals exhaustion in the uptrend.
Traders can utilise this information to exit the bearish position and look for a sell entry opportunity. An example can be shown on the chart below.
Similarly, for a bullish divergence, we tend to see the OBV indicator creating higher highs and higher lows patterns as the price is forming bearish structure by forming lower low and lower high patterns. The bullish structure formation of the OBV indicator shows increasing volume injected in the market which signifies the exhaustion of the bearish trend and possible price reversal to the upside. An example can be seen in the chart below.
Crypto Trade Using OBV indicator and Moving Average
In this section, I will analyse a crypto asset using OBV indicator and an exponential moving average indicator to carry out a trade position.
BTC/USD Buy Position with OBV
From the chart below, we can see price create a higher high formation which shows a strong bullish trend movement. This bullish trend was confirmed using the OBV indicator as we also see the OBV line creating higher high and higher low formation.
Furthermore, we can confirm this signal using the exponential moving average as we see price trading above the exponential moving average line. This also confirms the bullish trend.
A trading position was opened using a 1:2 risk-reward ratio with stoploss placed below the moving average.
LTC/USD Sell Trade with OBV Indicator
Looking at the chart below, we can see LTC/USD in a downtrend creating lower highs and lower lows. This bearish trend can be confirmed on the OBV indicator as we equally see the line creating lower low and lower high formation which strongly confirms the downtrend. Now combining the OBV indicator with the exponential moving average for confluence trading, we tend to see the moving average also in line with the bearish signal. Price broke below the exponential moving average which shows that the downtrend is valid.
A sell position was placed using a 1:1 risk-reward ratio with a stop loss placed above the moving average line.
Advantages and Disadvantages of OBV Indicator
Advantages of OBV Indicator
- The OBV calculation is very simple and easy.
- The OBV indicator can give diverse signal information which includes trend confirmation, divergences, price breakouts and can also help to maintain good risk management.
- The signal information of the indicator can be strengthened and filtered when combined with other indicators like moving averages.
- The OBV indicator is suitable for any trading strategy.
Disadvantages of OBV Indicator
- The indicator can give a false signal in a low volatility asset.
- The indicator can't be used as a standalone trading system. It works best when combined with other technical analysis tools.
- The indicator is a leading indicator that is prone to price manipulation. It doesn't reveal the actual reaction of the market.
Conclusion
Technical indicators are essential in making good technical analysis. We have studied the On-balance volume indicator and how we can use its signal to make a good trading decision. The OBV indicator helps in identifying potential trends and also price breakouts. This can enable a trader to make a good trading decision in the market.
Just like every other indicator, the OBV indicator works best when combined with other technical analysis tools to avoid fake signals ans price manipulation as the indicator is a leading indicator.
Finally, proper risk management should be used when trading with the OBV indicator to cut losses early when things go bad in the market.
Thank you Professor @fredquantum for this amazing lesson.
https://steemit.com/hive-108451/@aizazghumman/steemit-crypto-academy-season-5-week-3-beginner-s-course-understanding-trends-ii
sir kindly check my homework
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