Forecast Market Moves with the OBV Indicator

Developed by Joseph Granville & introduced to the technical analysis community in his 1963 book Granville’s New Key to Stock Market Profits, On Balance Volume (OBV) is a popular indicator used to measure buying and selling pressure.

See the OBV in action in this quick video tutorial:

By definition OBV is a running total of volume. When the instrument closes higher than the previous close, all of the day’s volume is considered up-volume. Conversely, when the instrument closes lower than the previous close, all of the day’s volume is considered down-volume.

Granville’s theory behind the OBV is volume precedes price. When volume increases without any major moves in the price of an instrument, the instrument would eventually “spring” up. Similarly, when an instrument’s price remains unchanged yet volume is noticeably decreasing, this instrument is poised to fall.

The value of the OBV indicator does not hold much merit. Rather, it is the behavior of the OBV line that technical analysis use to forecast potential market moves via the following methods:

• Trend Identification
• Support & Resistance
• Divergence

Trend Confirmation

Determining the trend of the OBV and comparing it to the trend of the instrument studied can act as valuable trend confirmation tool. The chart below features the daily Gold Futures Contract over a 6 month period. One can easily identify the similar behavior of the GC and OBV indicator backing Granville’s theory of volume leading price.

Support & Resistance

Utilizing the same chart and timeframe, manually drawn support & resistance zones on the OBV indicator can provide technical analysts with additional insight on potential market behavior. As trading volume continues to meet resistance or support levels, it warrants further attention as a reversal or a flat market behavior could be on the horizon.

Divergence

Spotting divergence between an instrument and the OBV indicator can be less common & more challenging to identify in real time. Nonetheless, sticking with the principle that volume leads price, divergences can be a powerful indication that a change in price behavior may be forthcoming.

Below is a classic example of bullish divergence seen in the daily U.S. Treasury Bond Futures (ZB). The price trend is on a decline while the overall trend of the OBV is on the rise. This behavior demonstrates that the bears are losing power and the bulls are in the position to regain control of the market.

As with a number of trading indicators, the OBV has its limitations. Because the OBV is commonly used to predict market reversals, false signals can be a common occurrence. Therefore, utilizing the OBV as a confirmation tool alongside other methods of fundamental & technical analysis is typically considered best practice.

The OBV is just one of nearly 100 free indicators included in the award winning NinjaTrader platform. Get started with free futures and unlimited forex data & download NinjaTrader today!