On-Balance Volume Indicator

Binary options brokers do not only rely on bare price movements to look at the inner workings of a market. To do so would entail a vast amount of processing power that would require us to use our brains to its maximum potential. However, technical analysis of markets provides indicators that shows market sentiment in human readable form. These technical indicators that we have been discussing here give binary options traders solid signals that can prove fruitful when used correctly.

Traders often utilize technical indicators to help them assess price movements by identifying distinct patterns when it comes to the different parameters that goes in a trade. By using indicators, traders can suppress background noise that can often disguise themselves as distinctive patterns. When these noise are minimized if not eliminated, the trader is able to have a clearer look of what is really going on in the market, and make the appropriate actions based on accurate historical price movement.

For instance, a trader who is interested in the volume and price action of a particular asset should look for an indicator that smooths this relationship to visible points in a clean, noiseless chart. The indicator that we are referring to is the On-Balance Volume or OBV. The OBV is a technical indicator that is used by binary options traders and general traders alike. It is used to relate price and volume in the stock market.

On-Balance Volume is also a method that is employed by traders who perform technical analysis to detect momentum, where the calculation of OBV relates volume to price change. It is a cumulative total volume, meaning the current OBV value is the summation of the previous OBV values. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security.

This indicator was developed by Joe Granville in 1962. It was one of the earliest forms of momentum indicators, described in Granville’s book, How To Read The Stock Market. Granville was a popular financial writer who attempted on predicting future prices of stocks, commodities, and other financial assets traded on financial markets for which historical price and volume information is available. Mr. Granville recently died in September of this year at the age of 90.

Volume

In market trading, volume, also known as trading volume, is the number of shares or contracts traded in a security or in an entire market in a given period of time. For example, volume is reported as the number of shares that changed hands in the stock exchange during the entire trading day. Although volume may be seen in this sense, or in pre-determined time intervals, volume can also refer the instantaneous amount of trade shares or contract for a particular asset.

In a sense, volume is simply the amount of shares that trade hands from sellers to buyers as a measure of activity. If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction. The more transactions like these for a particular asset, the greater the volume for that asset. One could therefore expect great volume during heavy trading.

The average volume of an asset is normally reported as the average volume over a longer period of time, usually one to three months. During significant instances such as quarterly reports by companies, significant positive or negative news is made public, and the volume of the company’s stock will usually deviate from its average volume. The deviation will determine whether there are more people trading this stock or not.

Higher volume for a stock is an indicator of higher liquidity, the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity, just like volume, is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. For institutional investors who wish to sell a large number of shares of a certain stock, lower volume will force them to sell the stock slowly over a longer period of time.

Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move. Traders use this relationship to make the appropriate action based on what is signaled by the indicator.

On-Balance Volume Calculation

Computing for the points that make up the On-Balance Volume indicator uses the following formulae. The formulae are representative of three scenarios: 1) when the current closing price is greater than the previous closing price, 2) when the current closing price is less than the previous closing price, and 3) when the current and previous closing prices are equal. Because OBV is a cumulative result, the value of OBV depends upon the starting point of the calculation.

  • for the 1st scenario: OBV = OBVprev + Volume
  • for the 2nd scenario: OBV = OBVprev — Volume
  • for the 3rd scenario: OBV = OBVprev

The volume for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value. Price and OBV should have a direct relationship wherein OBV should be up when prices are up, and when prices make a new rally high, then OBV should as well. If OBV fails to go past its previous rally high, then this is a negative divergence, suggesting a weak move.

OBV and Trend

Because of the nature of the indicator, the OBV is an effective way of determining the birth and death of price trends. For example, if a trader observes the OBV producing a sequence of higher highs and higher lows, then you should expect that price is about to enter a new bull trend. Similarly, lower lows and lower tops could signify a new bear trend. Knowing these characteristics, binary options traders can now make the appropriate Call or Put trades.

The OBV can also be applied to stocks individually based upon their daily up or down close, or to the market as a whole, using breadth of market data. Knowing how the OBV is generally used to confirm price moves is the key to using this indicator effectively. Generally, volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend more volume on up days than down days.

For more technical indicators and training strategies, stay tuned. Meanwhile, we will continue to update our list of top binary options brokers for you to choose from. Pick one and start trading today.

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