OBV indicator uses trading volume to predict price changes of an asset

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Bitcoin and Crypto Technical Analysis Thursday, December 02, 2021 - 19:33

In the previous editions, we briefly touched on the introduction of technical analysis (TA) including how to identify support and resistance zones, moving averages - we encourage you to read it for better understanding. Do remember that, as an investor, you should not be too worried about TA or shorter timeframes. They are more relevant for traders who frequently trade to book higher profits, though with higher risks. Today, we will introduce the concept of On-Balance Volume (OBV) indicator.

On-Balance indicator - an introduction

While the name On-Balance indicator certainly sounds complicated, it is in fact one of the simplest indicators to understand. OBV is a technical indicator that uses the flow of trading volume to predict the changes in crypto asset price. It measures the buying and selling pressure on a cumulative basis that adds volume on green days (closing price is higher than opening price) and subtracts volume on red days (closing price is lower than opening price). Here’s a price chart of a crypto asset along with OBV trendline at the bottom.

Technical Analysis chart

Source: Tradingview, Binance

If today’s closing price is greater than yesterday’s closing price, then yesterday’s volume is added to today’s volume to get the OBV. Whereas if today’s closing price is lesser than yesterday’s closing price, then yesterday’s volume is subtracted from today’s volume to get today’s OBV. For example, if we look at, say, the daily chart of Bitcoin where volume on a green day is 200 (ignoring the units), then 50 on a red day and 300 on a green day after that. Then OBV would be 200, 150, 350 for these three days. The absolute value of OBV does not tell anything on its own, OBV can be positive or negative or even near zero. It's the direction and trajectory of OBV that we are concerned with.

Finding divergences

Divergence is when the price of a crypto asset is moving in the opposite direction of a technical indicator like an OBV. When the price of the asset forms a higher high and OBV forms a lower high, then it is a bearish divergence. In the opposite scenario, when the price of an asset forms a lower low and OBV forms a higher low, then it is a bullish divergence. When a bearish divergence forms, it usually means the price of the asset is likely to go down and vice versa for bullish divergence. OBV divergences are generally used to identify the market conditions of the asset and not to enter trade positions.

Finding Breakouts

Predicting breakouts is one of the most interesting use cases of OBV. The reason is that the OBV trendline behaves similar to the price trendline. One can spot patterns, support/resistance, retests etc on the OBV too. So, it is useful to anticipate good trades using OBV because breakout on the OBV is much likely to happen before the price breakout. It is also important to understand that these insights rely on predictions and it always comes with a probability which means it could go wrong on a few occasions.

Technical Analysis Chart

Source: Tradingview, Binance

For example, if you look at the current daily chart of VET/USDT above and the corresponding OBV, it is evident from the uptrend of OBV that the volume was up on most of the days from March 2020. This indicates that an accumulation phase is underway and a breakout is likely to happen down the line.

To wrap it up, OBV is simple to understand and use but as a standalone indicator, it is weak when it comes to confidently predicting price changes. So it is always advisable to use other indicators like support/resistance levels, relative strength indicator (RSI), moving averages etc in tandem for better predictions. If readers are interested in understanding more simple technical concepts and indicators, please comment on our socials, we would be happy to cover those.

Disclaimer: This article was authored by Giottus Cryptocurrency Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.

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