How do I Trade with the On-balance volume (OBV) Indicator?

How do I Trade with the On-balance volume (OBV) Indicator? On Balance Volume Indicator (OBV) is a volume-based technical analysis indicator that measures bullish and bearish volume. It can be employed as a standalone or complementary indicator to analyze the strength of a market and identify potential price reversals. When you see an uptrend with increasing OBV, buyers outnumber sellers. The reverse is also true when you see decreasing OBV in a downtrend. By combining the two, we can get a clearer picture of where the market currently stands, which helps us make clearer decisions about when to buy and sell stocks. In this article, we’ll explore both passive and active ways to trade with the On-balance volume (OBV) Indicator.

Exactly how to Trade with the On-Balance Volume Indicator

The number one thing we should do is get a reading on the OBV indicator. If it appears bullish, we’ll look to buy the stock if it also has a support level. If the OBV indicator is bearish, we’ll look to sell the stock if it has a resistance level in place. Let’s take a closer glimpse at how we can do this. A bullish OBV reading implies that the stock’s price rises faster than its volume. Therefore, a bearish OBV reading means that the stock’s price is falling faster than its volume. This indicates that the stock is experiencing more downward pressure than upward pressure. The OBV indicator can confirm price patterns and identify key levels like support and resistance. Let’s say we see a bullish OBV breakout. We can then use it to confirm our bullish price pattern by looking for a higher low before buying. And we can also use it to identify key levels like support and resistance, as discussed earlier. Support is where the price has previously bottomed out, or demand has been strong enough to prevent the price from falling further. Resistance is where the price has previously topped out, or supply has been strong enough to prevent the price from rising further. You can also use the OBV indicator to identify stops. A trader who has bought a stock and put a stop-loss order below the current price is waiting for the OBV indicator to turn bearish so that they can cut their losses.

Trading with the OBV Indicator Using Support and Resistance

Support and resistance are key levels that can be used in any market. We can use the OBV indicator to confirm key support and resistance levels, which will help us better time our trades. For example, let’s say that the market is in a downtrend, and we’re looking at a particular stock. If the OBV indicator shows that demand currently outweighs supply, we’ll know we should avoid buying this stock. However, if the OBV indicator shows that supply currently outweighs demand, this could be an excellent buying opportunity. Now, it’s important to note that the OBV indicator is not a trading system. You can’t just buy a stock when the OBV indicator turns bullish or sell it when it turns bearish. You still need to use the stock’s price action as part of your trading strategy. You can use the OBV indicator to confirm key resistance and support levels, but remember that these levels could also be false. So before buying a stock with a bullish OBV indicator, make sure that the price has actually broken above resistance, as well as confirming with the stock’s price action.

Trade with the OBV Indicator by Identifying Stops

The OBV indicator can additionally be used to identify stops. Traders will use the indicator to determine where the price could be stopped. For example, if the rate of a stock is currently $100, and a trader has bought the stock with a stop-loss of $95, the OBV indicator will determine where the price would be stopped. If the OBV indicator is bullish, the stock price would be stopped at $95. If the OBV indicator is bearish, the stock price would be stopped at $101. The advantage of using the OBV indicator to identify stops is that you can use it across multiple stocks. If a stock’s price approaches your stop, you’ll get an early warning when the OBV indicator changes. If it’s bullish and changes to bearish, the stock price has reached its stop. You’ll then know that you need to get out of the trade.

Final Words

The On-balance volume (OBV) Indicator is a volume-based technical analysis indicator that measures bullish and bearish volume. It can be treated as a standalone or complementary indicator to analyze the strength of a market and identify potential price reversals. The OBV indicator can confirm price patterns and identify key levels like support and resistance. It can also identify stops and act as a trading signal.