Metatrader Indicators: OBV or ON BALANCE VOLUME
ON BALANCE VOLUME is another technical indicator which is used to relate the volume to the change in price. This indicator was brought in by Joseph Granville and is a very simple one. When security finishes off with a value that is higher than its previous closure then it is considered an up-volume for the whole of the day. When the situation is reversed i.e.: the present value of closure is lower than its previous value, then the situation termed as down-volume.
It is understood that the change in on balance volume is ahead of price changes. It is noted that with a rise in on balance volume there is an inflow of smart money.
A situation of “Non confirmation” occurs when the movement in price goes ahead of on balance volume movement. Non confirmation can happen during bullish markets (earlier rise in security than OBV) or bearish markets (earlier fall in security than OBV).
The rising trend of OBV is noted when there is every new growth reaches a mark above its previous growth and every new reduction is more than the previous reduction. In the same way the falling trend of OBV is noted when every high is lower tan its previous high and every low is lower than it previous low. If the movement of OBV is sideways with no significant growth or reduction, then the trend is said to be doubtful.
A trend once formed, cannot be altered until and unless it is broken. To break the trend of OBV , two ways have to be followed, the first being the change in trend from high to low or from low to high. The second way is if by any chance the trend becomes doubtful and stays as long as 3 days. Therefore, it can be noted that if the trend is doubtful and it lasts for 2 days and then shifts to a rising trend on the third day, it is assumed that the trend was ever rising.
Changes in OBV, from a rising to a falling trend might cause a “breakout”. As OBV breakouts tend to go ahead of price breakouts, it is better to buy when there is an upside OBV breakout and sell off when there is a downside OBV breakout. Investors must hold on to the position until there is a change in trend.
Calculation of OBV:
If closure today is larger than the closure yesterday - OBV(i) = OBV(i-1)+VOLUME(i)
If the closure today is smaller than the closure yesterday - OBV(i) = OBV(i-1)-VOLUME(i)
If both the closures are equal - OBV(i) = OBV(i-1)
Where:
OBV(i) stands for indicator value of today;
OBV(i-1) stands for indicator value of the previous day;
VOLUME(i) stands for the volume of the present bar.
