On Balance Volume - How to use it in Trading

               On Balance Volume Volume indicator to gauge the Volume Flow in a stock. On Balance Volume is a running total of volume calculated by Adding and Subtracting Volume. If the Price is up, OBV adds the volume and if the price down OBV subtract the volume.In this article we discuss the features of OBV, How to analyse Price action using OBV, How to use it in Trading, Limitation of OBV.
  • Look at the whole Characteristics of OBV Line. Comparing with today's obv with yesterday, this hour with Previous hour.. etc are confusing
  • OBV is a leading Indicator. means OBV Line moves first and price will follow the move
We can Use OBV Three ways or three situation
  • Confirmation for the Current Trend (Price and OBV Line Move One side)
  • Look for Divergence (Price and OBV Line Move opposite)
  • Analyzing Valid Breakout
Helps to gauge the Accumulation and Distribution of Stock

 The On Balance Volume Help us to know whether there is an accumulation happened in the stock. OBV Line will move higher if there is accumulation. Means most of the traders Mainly Smart Money are in Buying side.
If smart money is in selling side, the stock will show selling interest more than buying interest. Thus OBV line will be on the downside move. We can understand there is a Distribution in that stock.

Trading Setup using On Balance Volume

 There are mainly Two types of trading setup is there can use with On Balance Volume
  • Breakout Trading
  • Divergence Trading
Breakout Trading
            OBV uses in two types of breakout trading. 
  • Trendline breakout
  • Previous High Breakout (Not Previous Day)
          OBV line moves prior to Price move. Means OBV moves first and price follow the OBV Line Move. If a breakout Happen, whether it is Previous High Breakout or Trendline Breakout, OBV Line Should move prior to price move. Means OBV must breaks previous OBV High or OBV Line Trendline break before Price Breakout. In a valid Breakout OBV line breakout should be happen before price breakout.
            In an Uptrend, Accumulation is the base for any upmove. OBV Line moves based on Accumulation. So the OBV line up move indicate that there is accumulation is taking Place. Price moves based on this accumulation. If price is moving upward and obv do not move upward, it indicate that price movement of without accumulation will not sustain. Price brakout with enough Volume only sustain and it will be the valid price move and breakout.
Price Action
OBV Action
What will Happen
Cause of The Action
Entry
Price Broke Previous High
OBV Still Below Previous High
Less Chance for Price breakout
Not enough Accumulation
No Trading Opportunity
Price Just Below Previous High
OBV Broke Previous High
High Chance of Price to break PH
Accumulation Has taken Place
Wait for Price to break Previous High for Entry
Price Broke Trendline
OBV not yet broken Trendline
Breakout May not Sustain
Trendline break not validated by accumulation/Distribution.
No Entry
Price Not yet Broken trendline
OBV Broke Trendline
High probability that Price may Break trendline
Accumulation/Distribution has taken Place There
Wait for Price to Break trendline

Below are Some Rules For trading Previous High Breakout Trading
  1. Price Should be continuously Moving up or Down with Clear Trend
  2. OBV Line Should break Previous High / Low Prior to Price breakout
  3. If Price was Reversed from Up to Down, Trade only after Last Higher Low Breakout (in Uptrend) and Vice versa. (Otherwise it may be just a Correction move or Consolidation)
For Trend line Breakout Trading, these Observation and Rules help you for right Trading
      Trendline Breakout can be classified into two. One is Major trendline Breakout which is complete momentum change form uptrend to downtrend or vice versa. and the other is short term trendline breakout which is just an Impulsive corrective breakout which happen in price trend.
Divergance Trading 
            We learned that accumulation is must for a price up move. Sometimes, price may move upward without accumulation means OBV line do not move to upward direction line will be either Flat or Downward. Price Up move without Accumulation will not sustain. A price trend will change to downward any point of time. Trading on this types of trend change is known as Divergence trading.

Price Movement
OBV Line Movement
What it tells
Cause of this OBV and Price Action
Entry Point
Price Move Upward
OBV Line Move Upward
OBV Confirmed the Price Movement
Enough Accumulation for the Price Movement
Not high Probability Trading
Price Move Upward
OBV Line Move Downward or Flat
Uptrend will not sustain. Trend change can be happen any time
Not enough Accumulation. Price cannot upside Move without accumulation
Wait for Price to Reverse. Trendline Breakout, Candlestick reversal pattern are entry Point
Price Move Sideways
OBV Moves Upward
Price will break to Upward direction soon
Accumulation is taking Place.
Wait for the Price to Break Resistance Level for Entry
Price Move Sideways
OBV Moves Downward
Price will break to Downward direction soon
Distribution is taking Place
Wait for the Price to Break Support Level for Entry

For Divergance Trading

For High Probability and highly Accurate Trading, Consider Trading, Some Price or Chart pattern rules also consider
  • Price should be clearly trending Upwards or Downwards
  • Higher High Higher Low and Vice versa chart pattern combining OBV give best result
  • There should be clear width between two price waves
  • Look for Previous High not for Previous Day High
  • Sideways chart might be little bit confusing without clear OBV upward or downward move

Comments

Post a Comment

Popular posts from this blog

How to Confirm a Trend Change. Method to identify momentum change

Image
Condition 1 From down trend to Uptrend, At least one higher Low is essential for trend change. And followed by Higher High will confirm the trend change Condition 2 From down trend to Uptrend, Last Lower high in downtrend should break to confirm the trend change.(In the above picture, LH  Just before the Last LL ) Condition 3 1 2 3 PATTERN OR SWING LOW PATTERN CAN BE USED TO IDENTIFY MOMENTUM CHANGE Condition 4 Use trendline Break with above rule together for true result By checking and ensuring the above condition whether the conditions are met or not met will help you to identify the trend change. we ca not get to the conclusion with only one condition above. for example, we can not say that trend has changed if the trendline is breaked
Read more

Trade on Trends and Trade Against the Trend Pros and Cons

Image
Price is always trending. When the price trends or move in a direction, it provides the opportunity to trade. "Understand well the which direction is the price is trending or Moving" is the first step to the success. These major price trend or price movement, whether it is up or down, creates trading opportunities on both direction. IE. In A trending market, it gives 2 side trading opportunity. Trade on the direction of major trend Trade on the Opposite direction of trend Price moves by waves creating swing lows and swing highs (Higher high Lower Lows). Here we know that the Trading on the direction of trend is more easier and smoother than trade against the trend. Below picture shows it more conveniently In the above Picture, Price is moving downwards that's why the major trend is to down. Eventhough the trend is down it felicitate trading opportunities on both side. Trade on Trend and Trade Against the Trend. The Point 1,3,5,7 are the shorting trade poi...
Read more

Distinguish Retracement and Doubletop. trend or momentum is changing or not

Image
In an Uptrend (or Downtrend), retracement will be happened. But At    a point there may be double top indicating the trend change.here are some feature of both to identify the pull back which is a retracement or it is for trend change(Doubletop) Double top only happened on the top of a move. Ie. it happened only after a clear move to up or down. And the point of doubletop will be long in distance for a sideways move or volatility. While the retracement happened in every up move that may happened just above(below) the sideways channel In double top, last resistance will not be broken in up move In retracement, every resistance will be broken in up move In double top, last support may be broken in pull back just for a while indicating trend change In retracement, last support will not be broken indicating healthy trend Double To Usually leads to trend Reversal or Change in Momentum while retracement may not lead to trend reversal In Retracement, Price m...
Read more