Do you know the indicator what is OBV? This is one of the quite important tools. Let’s explore how it is used to track stock price trends and how it relates to price. OBV can help investors better understand the market and trade effectively. Same with MACD. Let’s Forex Trading learn how to use it through the article below.
Indicator what is OBV?
The first thing to understand is what is OBV? OBV, short for “On Balance Volume”, is an important tool in Forex market analysis. It uses trading volume and price movements to measure buying and selling power in the market.
This indicator was first introduced in 1963 by analyst Joseph Granville. To predict market trends based on fluctuations in trading volume. Granville believes that volume is an important indicator of market conditions. So OBV was developed to reflect this, indicating that when volume is strong. The market usually does not go sideways but will go up or down.
What is the MACD indicator?
MACD stands for Moving Average Convergence Divergence, which means Moving Average Convergence Divergence. Developed by investment advisor Gerald Appel in 1979, the MACD line is an important technical indicator in Forex trading. It helps investors identify market fluctuations and identify buy and sell signals. To calculate MACD, investors use the difference between two 12-day and 26-day Moving Averages (EMA).
Do you know what calculate break-even point is? The break-even point (BEP) is an important concept in business. Refers to the level of sales or product output that needs to be sold to achieve zero profit. It represents the equilibrium point between total revenue and total costs, i.e. there is neither profit nor loss.
In addition, you should also know what is a bear trap to better grasp the knowledge. Bear Trap is a fault phenomenon that occurs when there is a price decline within a long-term uptrend. Usually occurs when investors react incorrectly to inaccurate data or information.
How to calculate MACD
To calculate the MACD indicator, we use the following formula:
MACD = EMA(12) – EMA(26)
- If the 12-day moving average (EMA) is greater than the 26-day EMA, then the MACD will be positive.
- If the EMA value of the 12-day period is less than the EMA of the 26-day period, then the MACD will be negative.
See more: Learn Dow theory for trading beginners
How to use the MACD indicator
Common uses of MACD include:
- Crossover point: Sell when MACD goes below the signal line and buy when MACD goes above the signal line. Just like when MACD crosses level 0.
- Overbought/Oversold: MACD can indicate overbought or oversold conditions when the short moving average is far away from the long moving average, suggesting a price correction.
- Divergence: MACD diverges with price when creating a new bottom but price does not create a similar bottom. Or when MACD establishes a new peak but the price does not. This is a sign that the current trend is about to change, especially when it occurs in the overbought/oversold zone.
Characteristics of the indicator what is OBV?
OBV, or On Balance Volume, is a cumulative indicator. It adds volume if the stock price increases and subtracts volume if the price decreases from the previous session. This accumulation forms upward or downward lines. Helps investors recognize overbought and oversold conditions in the market.
Formula to calculate OBV
The formula for calculating the OBV indicator depends on trading volume and closing prices from the previous session. Calculation rules what is OBV? There are three rules for calculating OBV as follows:
- If the closing price of the current session is greater than the closing price of the previous session, then:
current OBV = previous OBV + current volume - If the closing price of the current session is less than the closing price of the previous session, then:
current OBV = previous OBV – current volume - If the current session’s closing price is equal to the previous session’s closing price, then:
Current OBV = Previous OBV
The meaning of what is OBV?
The OBV indicator is a tool that reflects the trading volume of a stock. Or the Forex index over a certain period of time. Specifically the meaning of what is OBV according to each level?
- When the OBV index increases, it usually occurs when the trading volume on bullish sessions is greater than that of bearish sessions. This indicates stronger buying power than selling power, predicting that prices may rise.
- Conversely, when the OBV index falls, it usually happens when the trading volume of the down sessions is larger than the up sessions. This indicates buying power is weaker than selling power, predicting that prices may fall.
- If OBV increases but the price does not increase or even decrease, this may indicate that selling power is waning. And the price is also likely to increase again.
- Similarly, if OBV falls but the price does not fall or even increases, this may indicate that purchasing power is waning. Prices may turn back down again.
Meaning of MACD indicator
MACD is a popular indicator, used to forecast price trends.
- The MACD line and the signal line determine divergence and convergence, helping investors determine buying and selling points.
- When the MACD line crosses the signal line from below, it is a buy signal, and vice versa, it is a sell signal.
- Divergence appears when prices rise and the MACD line goes down, creating a selling opportunity, while convergence occurs when prices fall and the MACD goes up, creating a buying opportunity.
Reasons to use what is OBV?
So you have grasped the theory of what is OBV. The next thing to learn is why you should use the indicator what is OBV. Some reasons can be mentioned below.
Reinforce the trend
With a focus on volume, OBV follows the usual principles of volume analysis:
- As price increases and volume increases, OBV increases, indicating that buying remains strong and the uptrend may continue into the future. Especially if the OBV line remains bullish or maintains an upward slope.
- If the price increases but the volume does not increase or decrease, the OBV line will gradually decrease. This indicates a decline in buying power.
- Conversely, if the price falls and the downward slope of the OBV line increases. That is a sign for the downtrend to continue.
- In case the price falls the slope of the OBV line decreases, indicating a weakening of selling pressure.
Signals diverge and converge
Divergence signals appear when price and OBV move in opposite directions:
- When the price increases but OBV decreases, it shows that the selling force is stronger than the buying force, a sign of weakness in the uptrend, a bearish reversal can be predicted.
- When OBV increases while price decreases, it indicates that buying power is stronger than selling power, representing a potential upside reversal.
Convergence signals appear when price and OBV move in the same direction:
- When both price and OBV increase, demonstrating bullish consensus, expect the uptrend to continue.
- Similarly, when both price and OBV are falling, showing a bearish consensus, the downtrend is expected to continue.
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Notes when using what is OBV?
So what are the notes what is OBV when using this indicator?
- Similar to other indicators, combining the OBVindicator with other indicators is necessary to achieve the best results.
- Because the OBVindex only considers the fluctuations of + and – signs in the formula. Unable to evaluate the increase or decrease in stock prices, especially during periods of strong fluctuations with low trading volume.
- Calculate total trading volume instead of just using active buy and sell order differences. This also makes the index unable to accurately reflect the pressure of buyers and sellers during the trading session.
Conclude
Hopefully, through this article, you have had an overview of the indicator of what is OBV and how to apply it most effectively in trading. This way, you can use this tool along with other knowledge that Forex Trading provides to trade successfully. Read more of our other articles to achieve the highest profits!
FAQs
What is the average daily trading volume?
Average daily trading volume (ADTV) is the average number of shares traded each day for a particular stock. ADTV has important value because it reflects the level of liquidity. Investors often use ADTV to evaluate liquidity and analyze price fluctuations. It can be combined with OBVs and other indicators to evaluate the market.
What is the difference between On Balance Volume and Volume Price Trend?
Price-Volume Trend (VPT) is similar to OBVs in measuring trading volume and providing information about a stock’s cash flow. However, the main difference is that VPT doesn’t just consider higher or lower trading volumes. But also pay attention to the increase or decrease in trading volume. This helps predict the price direction of the stock and know the extent of price fluctuations.
Is OBVs leading or falling?
OBV. is considered one of the important indicators. However, it only creates predictions without providing detailed information about specific causes or developments. For greater efficiency, OBVs should be used in combination with lagging indicators.
