On Balance Volume is a cumulative indicator which measures the volume based on buying and selling pressure. It is developed by Joe Granville.
It is only indicator available to measure balance volume. Forex trader can use OBV for trend confirmation, to identify support and resistance levels and also for divergence trading.
OBV is shown in above diagram with candle chart.
On Balance Volume Calculation: OBV can be calculated simply by cumulative of total of positive and negative volume.
It will be positive if close is above the prior close price and negative if it is below prior close price.
We can better explain above calculation with the help of example below.
In the above Table up/down column +1 or -1 is only shown for signal. Its real effect is on volume.
Trading with On Balance Volume Indicator:
Forex traders can use On Balance Volume indicator to take long (Fresh) or short positions. In an uptrend or downtrend wait for the indicator to make bottoms or peaks then enter in the direction of trend. We can understand with the help of below diagram.
In above Diagram we can see an uptrend in the price. The On Balance Volume indicator is also showing an uptrend but it has made many bottoms. These are the entry points for long positions.
Support and Resistance:
OBV can also be used for support and resistance. Check the following picture. In this picture you can see support and resistance lines in the OBV indicator. Even though in the actual price chart there are no support and resistance levels you can see how the price reversed.
Forex traders can use bullish and bearish Divergence for taking fresh long or short position using OBV indicator. We can understand better with the help of below Diagram.
In OBV if higher lows formation is happening it simply means bullish Divergence. We can see how price reacts. It is a good bet for Forex trader.