TA-8: On Balance Volume indicator to analyse volume of transactions

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On Balance Volume was developed by Joseph Granville in the 1960s and is a momentum indicator that uses the volume flow to predict changes in the price of the coin. It relies on the concept of divergence:

  • when the transaction volume increases sharply without a significant change in price, that means that the price will eventually jump up. This corresponds to the price moving to a higher high but the OBV indicator is going down.
  • when the transaction volume decreases sharply without a significant change in price, that means that the price will eventually go down. This corresponds to the price moving to a lower low but the OBV indicator is going up. 

The On Balance Volume (OBV) is a running total of volume, which takes into account both increases and decreases in the volume of transactions. There are 3 main rules used to calculate OBV:

  • IF today’s closing price > yesterday’s closing price, the current OBV = previous OBV + today’s volume
  • IF today’s closing price = yesterday’s closing price, the current OBV is equal to the previous OBV
  • IF today’s closing price < yesterday’s closing price, the current OBV = previous OBV – today’s volume

Example

Let’s look at a hypothetical coin and its closing price and volume over 5 days:

  • day 1: closing price = £1, volume = 25,000 transactions
  • day 2: closing price = £1.25, volume = 35,000 transactions
  • day 3: closing price = £1.40, volume = 30,000 transactions
  • day 4: closing price = £1.15, volume = 40,000 transactions
  • day 5: closing price = £1.10, volume = 10,000 transactions

Closing price is higher than the previous day’s closing price on days 2 and 3. That means that on these days we add the previous day’s volume.

Closing price is lower than the previous day’s closing price on days 4, 5. That means that on these days we substract the previous day’s volume.

Day one: OBV = 0

Day two: OBV = 0 + 25,000 = 25,000

Day three: OBV = 25,000 + 30,000 = 55,000

Day four: OBV = 55,000 – 40,000 = 15,000

Day five:  OBV = 15,000 – 10,000 = 5,000

How to use Coinigy to assess OBV

In this video I am going to show you how you can use the OBV indicator along with the volume graph and the price trend on Coinigy:

A green candle (buying bars) on the volume graph corresponds to a upward movement on the OBV line, whereas a red candle (selling bars) on the volume graph corresponds to a downward movement on the OBV line.

As we discussed in the MACD technical analysis tutorial, generally speaking a W shape in the price trend will indicate an upcoming bullish movement (buying) and a M shape in the price trend will indicate an upcoming bearish movement (selling).

Use the divergence concept to predict future price 

When you see a divergence trend happening, there are 2 main situations that can happen:

  • when the price of the coin is going to a higher high but the OBV indicator is going down, that is a sign that there is an upcoming bearish movement, so that is not a good time to buy
  • when the price of the coin is going to a lower low but the OBV indicator is going down, that is a sign that there is an upcoming bullish movement, so that can potentially be a good time to buy

This is an illustration of what a bullish OBV divergent move would look like – you can see that the price is going down, however the OBV indicator is going up which means that there is an upcoming bullish movement (people buying – green candles – as is indicated by the 2 yellow arrows on the right hand side):

 

 

 

 

 

 

 

 

 

 

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