ON BALANCE VOLUME INDICATOR

There are hundreds of technical indicators out there with many different uses. One technical indicator that is very useful at analyzing volume is the On Balance Indicator or OBV.

Basically, on green days, the volume from those days is added to the value of OBV. And the volume from the red days are subtracted from OBV. Essentially it can be used as a quasi method to determine if there are more buyers or sellers stepping in over a specific period of time

OBV can be used to confirm a bullish or bearish trend. If OBV's value is increasing with the price action then that can be used for a confirmation signal of the bullishness. Conversely when OBV's value is decreasing with falling price action then that can be used as a confirmation signal for the bearishness.

OBV can also be used to show when a trend is losing strength in a potential reversal may be in the near future. It can also be used to possibly get an idea if the buyers and sellers are accumulating or distributing shares.

In the chart directly below you can see how the price action is essentially making higher lows and higher highs, which is an uptrend. But the OBV indicator is decreasing in value. This is a divergence between the price action and the OBV indicator. This shows you that the uptrend in the chart below is weakening and a potential reversal is possibly in the future.

The decreasing OBV value also shows you that there are more sellers participating on the red days as compared to the amount buyers participating on the green days. This can help you decide if a price channel is an accumulation or a distribution phase on the chart.

OBV is not 100% correct all of the time just like all other indicators. But when used in tandem with other indicators, it can provide more confirmation, which can give you more confidence in your investments. In the chart directly above, you can see a volume indicator that includes volume candles and a moving averages for the candles.

If the volume's moving average is increasing during a bullish or bearish trend then that will confirm the bullishness or bearishness. When the volume's moving averages is decreasing then that shows there are less investors participating which shows a weakening trend.

Always remember that indicators should be used as a reference because they do not predict the future. And also keep in mind that the market does whatever it wants no matter what the indicators are telling you. So always keep in mind the broader overall market outlook, as well as the macroeconomic environment. When you couple that with your technical indicators and your technical analysis then your investments should be more profitable in theory.