OBV indicator is used to predict future price trends to help investors easily make transactions. At the same time, it helps confirm ongoing trends and identify pivot points as well as support and resistance levels. The article below, Crypto Trading will help you better understand this type of index. Because don’t skip the article below!
General introduction about OBV indicator
OBV indicator is used in technical analysis to come up with the right pricing strategy. Below is an overview of information about this indicator, find out now.
What is the OBV indicator?
OBV indicator (On Balance Volume), also known as the balance volume indicator. This is a technical analysis tool used to measure the buying and selling pressure of an asset over time. This type of indicator tracks the rise and fall of Crypto trading volume. Use indicators to predict changes in price trends.
Characteristics of OBV indicator in pricing strategy
During the Crypto Trading process, many traders have chosen to use OBV because of the following outstanding features:
Cumulative calculation: OBV value is calculated based on the closing price and trading volume of each session. Cumulative portion from the first trading session to the present. This helps the OBV indicator reflect the long-term trend of buying and selling forces.
Reflects changes in buying and selling power: When buying power prevails (price increases), OBV tends to increase. On the contrary, when selling pressure prevails (price falls), OBV tends to decrease. The slope of the OBV line represents the intensity of buying/selling pressure.
Price trend confirmation: The OBV indicator can be used to confirm price trends by other technical indicators.
Divergence detection: Divergence occurs when price and OBV move in opposite directions. A negative divergence occurs when the price increases but OBV decreases. Shows that the upward price trend may be weakening and there is a potential risk of reversal. Positive divergence occurs when the price falls but OBV increases. Signaling that the downtrend may weaken and potentially reverse.
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OBV calculation formula to perform Crypto Trading
The formula for calculating OBV for each trading session depends on the relationship between prices. Included are: the current close (Close), the previous session’s closing price (Closeprev), and the current trading volume (Volume).
There are three cases to calculate the OBV indicator :
- The current closing price is higher than the previous session’s closing price: Current OBV = previous session’s OBV + Volume
- The current closing price is lower than the previous session’s closing price: Current OBV = previous session’s OBV – Volume
- The current closing price is equal to the previous session’s closing price: current OBV = previous session’s OBV
Outstanding meaning of OBV indicator
This type of indicator is similar to the Stochastic Oscillator indicator, Bollinger band … Always carries with it some unique meanings. Specifically:
OBV is used to determine pricing strategy trends
Bullish trading sessions usually have higher trading volume than previous sessions. Unless the price decrease is due to investors selling off, then the OBV index will increase and vice versa.
In the bullish chart, OBV shows that active buying is higher than selling. At the same time, trading volume increases rapidly and prices will continue in an upward cycle over time. If this type of indicator decreases, active selling will prevail. At this time, trading volume decreased, breaking the short-term support level and establishing a bottom.
In addition, OBV also relies on volume increases and decreases to confirm price strategy trends. If price and OBV continue to increase, it is a good sign that the uptrend continues.
Identify price divergence
In case the OBV index begins to increase the candlestick price is still in a downtrend. This shows the weakening of the downward price trend and the preparation for an upward price trend. This indicator is suitable for determining price trends for long-term exchanges. However, like any type of technique, this requires a combination of multiple indicators to get good results.
Use OBV to identify price divergence when:
- Divergence occurs when price and OBV move in opposite directions.
- Negative divergence: price increases but OBV decreases. This shows that the upward price trend may be weakening and there is a potential risk of reversal.
- Positive divergence: price falls but OBV increases. Signaling that the downtrend may weaken and potentially reverse.
How to use OBV indicator details
To use the OBV indicator effectively to plan your pricing strategy, you can refer to the following information.
In Crypto Trading how to use OBV to determine the price
Use OBV to determine a pricing strategy based on the following characteristics:
- If there is an increase and volume continues to increase, it will cause OBV to increase. With this, it is forecast that buyers will continue to buy and the trend will still increase. In the future, if will be reinforced when the upward slope of the OBV line remains or even increases.
- If the price increases but the quantity does not increase or decrease, the OBV slope gradually decreases. This signals that buying power is tending to decrease.
- If the price falls the downward slope of the OBV line will continue to increase. This process represents a continuing downward trend in the future.
- If the price drops but the slope of the OBV line gradually softens, it shows that selling pressure is weakening.
How to identify divergence signals based on OBV indicator
Traders often use OBV to track divergences in the market. Divergence often occurs when the OBV line and the price line separate and go in the other direction.
If you see the price decreasing but the OBV increases: This situation shows that the selling force is weakening even though the price is still decreasing. This is a sign that the downtrend is about to end and there is a potential opportunity for a bullish reversal.
If the price increases but the OBV decreases: This situation shows that buying pressure is weakening even though the price is still increasing. This sign warns that the uptrend is about to end and there is a potential risk of a downward reversal.
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A few notes when using the OBV indicator to determine pricing strategy
Similar to other indicators, OBV needs to be used in conjunction with other indicators to be effective. Therefore, traders need to pay attention to choosing a combination with appropriate indicators.
Because price fluctuations affect the + or – sign in the calculation formula without considering the level of increase or decrease. So the OBV index does not clearly reflect the impact of the increase or decrease.
OBV may be suitable for long-term or trend-following investors. Because this indicator reflects the trend of buying and selling pressure over time.
Conclude
Hopefully, with the above article on Crypto Trading, you can understand what OBV is and how to use its OBV indicator. Hopefully, through this article, you can successfully apply this indicator. The information we provide above will certainly help you in the investment process. So, if you have any questions that need answering, please contact us immediately!
FAQS
What indicator should the OBV index be combined with?
OBV needs to combine it with other technical indicators to increase accuracy in analysis such as Trendlines, MACD, RSI, Bollinger Bands indicator…
Should we trust OBV to make investment decisions?
Do not rely on OBV and other technical indicators to make investment decisions. It is necessary to carefully analyze price charts, trading volumes, news, and other factors for a comprehensive assessment.
To use OBV effectively, what do investors need to do?
To use OBV effectively, investors need to clearly understand how it works, analyze it carefully, and update their knowledge…
