On-Balance Volume (OBV) – What It Is & How to Trade with It

On-Balance Volume (OBV) – What It Is & How to Trade with It

What is On-Balance Volume (OBV)?

The On-Balance Volume (OBV) is a cumulative volume indicator developed by Joseph Granville to measure buying and selling pressure. It tracks price movement relative to trading volume, helping traders confirm trends and anticipate potential reversals.

The OBV formula is:

• If today’s closing price is higher than the previous close:
  OBV = Previous OBV + Current Volume
• If today’s closing price is lower than the previous close:
  OBV = Previous OBV – Current Volume
• If today’s closing price is equal to the previous close:
  OBV remains unchanged

Key Features of On-Balance Volume

• Measures market momentum using cumulative volume.
• Helps confirm trend strength and potential reversals.
• Works well with trend-following and breakout strategies.

How to Use OBV in Forex Trading

1. OBV Trend Confirmation Strategy

Traders use OBV to confirm the strength of an ongoing trend:

• Bullish Trend: OBV is rising along with price, confirming upward momentum.
• Bearish Trend: OBV is falling along with price, confirming downward momentum.

2. OBV Divergence Strategy

Divergence between price and OBV can signal potential trend reversals:

• Bullish Divergence: Price forms a lower low, but OBV forms a higher low (buy signal).
• Bearish Divergence: Price forms a higher high, but OBV forms a lower high (sell signal).

3. OBV Breakout Strategy

OBV can signal a breakout before price movement:

• Buy when: OBV makes a new high, even before price breaks resistance.
• Sell when: OBV makes a new low, even before price breaks support.

4. OBV with Moving Averages

Pairing OBV with a moving average (e.g., 50 EMA) helps filter false signals:

• Buy when: OBV is rising, and price is above the 50 EMA.
• Sell when: OBV is falling, and price is below the 50 EMA.

Pros and Cons of Using On-Balance Volume

✅ Pros:

• Simple yet effective for confirming trend strength.
• Helps detect accumulation and distribution phases.
• Can anticipate price breakouts before they happen.

❌ Cons:

• Requires volume data, which some forex brokers may not provide.
• Can give false signals in choppy or ranging markets.

Final Thoughts

The On-Balance Volume (OBV) is a powerful volume-based tool that helps traders confirm trends, detect reversals, and anticipate breakouts. When combined with moving averages or price action strategies, OBV enhances trade accuracy and decision-making.