Traders
  • Qadir AK
    author-profile

    Qadir AK right arrow

    Author

    Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

    • author facebook
    • author twitter
    • linkedin

  • Reviewed by: Mustafa Mulla

    author profile

    Mustafa Mulla right arrow

    Reviewed

    Mustafa has been writing about Blockchain and crypto since many years. He has previous trading experience and has been working in the Fintech industry since 2017.

    • author twitter
    • author linkedin

OBV for Beginners: Analysing Crypto Price Movements Using Volume

Not all indicators rely on the same type of input. Just as some indicators use price data as their input, there are also indicators that depend on volume data. Among these indicators, On-Balance Volume stands out as one of the most prominent. It is time to explore this indicator and learn how to use it for ultimate success in cryptocurrency trading. 

1. On-Balance Volume: Whatโ€™s It

On-Balance Volume (OBV) is a volume-focused technical indicator, widely used by crypto traders. It predicts price movements by analysing trading volume. Created by Joseph Granville in 1963, OBV tracks buying and selling pressure almost accurately. Granville believed that major price changes occur when volume spikes, whether up or down. 

2. Calculating OBV: What You Should Know 

Calculating On-Balance Volume is easy. It is actually a cumulative method that relies on daily trading volume. To get started, understand the daily volume for each day, readily available on exchange platforms. Actually, OBV for today depends on adding or subtracting this value from yesterdayโ€™s OBV. 

There are three scenarios to consider:

  • If todayโ€™s closing price is greater than yesterdayโ€™s,
OBV = Yesterdayโ€™s OBV + Todayโ€™s Volume 
  • If todayโ€™s closing price is lower than yesterdayโ€™s,
OBV = Yesterdayโ€™s OBV – Todayโ€™s Volume 
  • If todayโ€™s closing price equals yesterdayโ€™s 
OBV = Yesterdayโ€™s OBV

Understanding these calculations is essential for using OBV in cryptocurrency trading effectively.

3. Step-by-Step Guide To Launch OBV on a TradingView Chart 

Here is the simple seven-step process to launch OBV on a TradingView chart.

  • Step 1: Sign In to TradingView 

Log in to your TradingView account to access your charts and trading tools.

  • Step 2: Search for a Random Chart

Use the search bar to find a random chart you want to analyse or track.

  • Step 3: Select a Random Chart 

Click on the chosen chart to open it on your TradingView workspace.

  • Step 4: Search for Indicator Icon

Look for the indicator icon, usually located at the top of the chart.

  • Step 5: Click and Launch OBV

In the indicator search space, type On-Balance Volume or OBV and select it from the list. It will add OBV to your chart.

  • Step 6: Configure OBV settings

Although default settings work fine, you can adjust โ€˜lengthโ€™ if you want more smoother OBV line. The default is generally 5. 

  • Step 7: Apply OBV and Do Analysis

Click โ€œOkโ€ to add chosen changes. Now, you can use the OBV indicator to get interesting insights from the chart.  

4. Ways to Use On-Balance Volume 

There are many ways to use this powerful indicator. Here are the three most popular ones:

  • Track Trends

If OBV is going up, prices tend to rise, and the opposite is true. Keep an eye out for situations where price and OBV move in different directions; it could signal a potential trend change.

  • Spot Divergence

When the price and OBV do not sync up, it can indicate a shift in the trend. A bullish divergence happens when prices hit lower lows, but OBV makes higher lows. On the flip side, a bearish divergence occurs when prices  reach higher highs, while OBV makes lower highs.

  • Use Complementary Indicators

The most brilliant way to use this indicator is to use this indicator alongside other technical tools, especially momentum indicators.  This is the best method to make fool-proof crypto trade judgements. 

5. Why You Should Not Depend on OBV Completely 

Though OBV is an amazing tool, there are a few important limitations. Here are the five important points why you should not depend on OBV completely. 

  • Not a Definitive Singal 

ONV is a tool for confirmation but does not offer clear buy/sell signals. It should be used alongside other indicators.

  • Lagging Indicator 

OBV lags behind, reflecting past market sentiment and may not predict future price movements.

  • Subjective Interpretation

Interpretation of volume activity varies among traders, making it less standardised.

  • Lack of Precision 

It does not indicate support or resistance levels, making precise entry and exit points challenging.

  • Market Suitability

OBV works best in highly active and liquid markets, not suitable for smaller or illiquid ones. 

Endnotes 

On-Balance Volume is a valuable tool for crypto traders, but it is not a crystal ball. It helps predict price moves by analysing trading volume. Remember, it has limitation. It is a confirmation tool, not a definitive signal, and it may lag behind actual market changes. Interpretation varies, making it subjective. OBV does not pinpoint exact entry and exit points and thrives in more active markets. For the most robust analysis, combine OBV with other indicators, creating a well-rounded strategy for successful crypto trading. 

completed lesson

Well Done! You have now completed the Lesson.

Complete the Quiz and Get Certified! All The Best!
Show More

Disclaimer and Risk Warning

The information provided in this content by Coinpedia Academy is for general knowledge and educational purpose only. It is not financial, professional or legal advice, and does not endorse any specific product or service. The organization is not responsible for any losses you may experience. And, Creators own the copyright for images and videos used. If you find any of the contents published inappropriate, please feel free to inform us.

Table of Contents
Back to top button