On Balance Volume (OBV) in Crypto Trading Explained
by LCX Team · March 28, 2023
On-balance volume (OBV) is a technical trading indicator that forecasts a crypto asset’s price movements based on the volume flow.…
If you are new to the world of cryptocurrency, or even if you are a seasoned pro, all the technical terms and jargon out there can be overwhelming. Thus, in this blog, we have provided a comprehensive guide to the on-balance volume (OBV) trade indicator.
Trade indicators are tools traders use to analyze and interpret market data, helping them make informed decisions about when to buy or sell a particular cryptocurrency. These indicators can be based on various factors, including price, volume, and market sentiment.
What is the on-balance volume indicator?
On-balance volume (OBV) is a technical trading indicator that forecasts a crypto asset’s price movements based on the volume flow. OBV is termed the compounding indicator that builds up the volume on up days and detracts volume on down days and gauges the purchasing and selling pressure.
OBV was developed by Joseph Granville. According to him, volume is the true indication of how the financial markets work, and even the price movements occur largely based on the volume itself. Granville believed that the price eventually sees a huge spike, either upwards or downwards, if the market volume of an asset experiences a sharp increase.
In the cryptocurrency market, the OBV indicator is used to gauge the buying and selling pressure of a particular cryptocurrency. Simply put, it works by measuring the volume of a cryptocurrency being traded on an exchange and comparing it to the price movement of the cryptocurrency over a given period of time. If the volume of a cryptocurrency increases while the price is also rising, this is considered a bullish signal, indicating that there is strong buying pressure and the trend is likely to continue. Conversely, if the volume decreases while the price is also falling, this is considered a bearish signal, indicating that there is weak selling pressure and the trend is likely to reverse.
How is the On-Balance Volume indicator calculated?
To calculate the OBV for a crypto asset, you first need to determine the daily volume for each day, which can be obtained from the exchange platform or the data feeds. Once you have access to the daily volume data, you can calculate the OBV for each day as follows:
- If the closing price for the day is higher than the previous day’s closing price, add the volume to the OBV.
- If the closing price for the day is lower than the previous day’s closing price, subtract the daily volume from the OBV.
- If the closing price for the day is the same as the previous day’s closing price, do not make any changes to the OBV.
In other words, If today’s close is greater than yesterday’s close then:
OBV = Yesterday’s OBV + Today’s Volume
If today’s close is less than yesterday’s close then:
OBV = Yesterday’s OBV – Today’s Volume
If today’s close is equal to yesterday’s close then:
OBV = Yesterday’s OBV
Why do crypto traders use the on balance volume indicator?
Due to the extremely volatile nature of cryptocurrencies, this indicator can provide clarity on market conditions so that traders can optimize their trading strategies. The LCX exchange offers integrated TradingView charts and allows traders to use indicators like on-balance volume and more while trading to let them tap into their full potential at trading. To get the nitty-gritty of common cryptometrics, read here: Most Common Crypto Metrics – LCX
The OBV indicator can be particularly useful in the market due to its high volatility and rapid price movements. By analyzing volume data in conjunction with price movements, traders can make more informed decisions about the direction and strength of a trend and adjust their trading strategies accordingly. One of the key benefits of the OBV indicator is its ability to confirm price trends. When the OBV indicator is rising while the price is also rising, it can be seen as confirmation of the bullish trend. Similarly, when the OBV indicator is falling while the price is also falling, it can be seen as confirmation of the bearish trend.
In Conclusion
The OBV is among the most important tools in many traders’ toolkits for understanding price momentum. The On-Balance Volume (OBV) indicator is a valuable tool for traders and investors in the cryptocurrency market. Whether you are a beginner or an experienced trader, incorporating the OBV indicator into your analysis can help you make more informed and profitable trades in the highly volatile and rapidly-evolving cryptocurrency market.
