What’s on the Balance Volume Indicator (OBV) • Benzinga
Investors are always looking for balance in their portfolios. A retirement saver can balance their assets with a 401(k) account and a Roth IRA to take advantage of various tax advantages. An investor can offset risky tech stocks with safer government bonds, especially when Treasuries are yielding interest rates close to 5%.
Balance is also important when looking for trade opportunities with technical analysis. Relying on just one indicator is not a recipe for success, and the best indicators use a variety of data points to draw conclusions. The Global Volume Indicator (OBV) uses price data over several days (or even weeks) to provide insight into the direction of trends for investors.
What is Balance Volume Indicator
The OBV indicator is a momentum trading signal that uses the volume of buyers and sellers over a period of time to project trends. The OBV can be used to help confirm the continuation of a current trend or indicate a reversal based on volume in the previous timeframe.
If you want to make a living trading stocks, you will need to understand technical trading signals like the OBV indicator. Long-term investors don’t necessarily have to worry about day-to-day market movements, but short-term traders should stay ahead of the trend.
How to Calculate OBV
Calculating the OBV requires continuous updating of data as it is a cumulative indicator used over a specific period of time. To calculate the OBV, you will need a starting point. The time period needed to use OBV is not a fixed number, but the more data points you have, the more accurate the indicator will be.
The calculation goes as follows: each day’s trading volume is added to or subtracted from the running total based on that day’s closing price. If the price is up that day, the trade volume is added to the running total. If the price closes, the volume is subtracted from the total. The cumulative total will form a trendline on the lower half of the stock chart, which can be compared to the price trend.
The formula looks like this:
- If price is down, subtract today’s volume from the previous day’s OBV
- If price is up, add today’s volume to previous day’s OBV
- If the price is unchanged, the OBV will be unchanged
How does this indicator work?
Getting into day trading requires data, good instincts, and market feel. Many technical analysis tools like the Relative Strength Index (RSI) produce specific numbers, such as 100 being oversold or 25 being undervalued or the Simple Moving Average (SMA) uses data to produce a price average specific over a certain period, such as 50 days. Although the OBV indicator spits out specific volume data points every day, the specific numbers are not very important when using it for signals, as it is the overall trend that matters.
OBV is best used as an indicator of “feel”. It’s not so much the daily volumes that matter, but the direction of the trendline that comes out of the calculation.
What does the OBV tell you?
The OBV indicator can tell you one of two things:
- If the OBV trendline matches the price trend, the momentum can be expected to continue in the current direction.
- If the OBV trendline moves opposite the price trend, momentum could slow as institutional investors buy or sell stocks wholesale.
Balance volume information
Here are some examples of the OBV indicator in action:
The OBV indicator can be used to signal a continuation of the current trend, regardless of the direction in which the stock price is moving. For example, if the OBV trendline matches the current price trendline, you can expect the trend to continue.
An important aspect of technical analysis is to detect changes in sentiment before price follows. Balance sheet volume is often considered an indicator of institutional trading because its trend line often deviates from the price trend when large institutional investors enter or exit positions. The separation of the OBV trend and the price trend can indicate changes in momentum.
Combine with other indicators
The OBV can be used with other momentum indicators like the Relative Strength Index (RSI) and exponential moving averages. Combining different momentum indicators can create a clearer picture of a stock’s trend and help reduce the rate of false signals.
OBV vs Accumulation/Distribution
The OBV indicator is a momentum indicator, like the accumulation/distribution (A/D) indicator, but they come to conclusions in different ways. OBV is a less complex formula – if price is up, volume is added and vice versa. The A/D indicator is more commonly used to find divergences and uses a money flow multiplier to formulate its trend lines. Both can be used to identify smart money, but the A/D indicator requires a more complex calculation.
Limitations of using OBV
Like any indicator, the OBV has its drawbacks. In choppy markets, the OBV trendline may match or diverge from the price trend, but false positives may occur, especially during particularly volatile times. However, false positives can be limited if other indicators are used in conjunction with the OBV to identify trends.
Use OBV with other indicators to find momentum
The equilibrium volume (OBV) can be a useful data point when adopting a momentum trading strategy. It is quite simple to calculate and can be used both to confirm trend continuation or to suggest reversals, if the data diverges from the current price trend. But false positives can still occur and OBV should not be used alone to make business decisions. Although OBV sometimes captures what institutional traders are doing in front of the public, investors should always confirm multiple signals and use all available data points when making short-term trades.
Frequently Asked Questions
Is equilibrium volume a good indicator?
The OBV indicator is a momentum signal that can be useful for confirming trends or detecting reversals before the security’s price can follow.
What is the best time frame for the OBV indicator?
The OBV indicator is a signal used by day traders and swing traders to detect short-term movements in momentum. Incorporating more volume data is always better than less, but there is no set time frame for success when using OBV.
The RSI is used to help indicate if a stock is overbought or oversold, which could signal a change in trend. OBV is used to detect both trend changes and trend continuations. Both indicators work best when used in tandem.
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