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: What’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 yesterday’s OBV. 

There are three scenarios to consider:

• If today’s closing price is greater than yesterday’s,

OBV = Yesterday’s OBV + Today’s Volume

• If today’s closing price is lower than yesterday’s,

OBV = Yesterday’s OBV – Today’s Volume

• If today’s closing price equals yesterday’s

OBV = Yesterday’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 ‘length’ if you want more smoother OBV line. The default is generally 5. 

• Step 7: Apply OBV and Do Analysis

Click “Ok” 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.