Volume is an important market component that every trader should factor in, as you will be buying or selling into that volume when you make your entries and exits. The On Balance Volume chart, or OBV chart, reacts to the buying and selling pressure of the asset, adding volume during up periods and subtracting volume on down days.
The OBV is displayed as an oscillating line that is tagged with the relevant volume figures related to each individual period.
When volume within up periods outstrips volume within up periods, then the OBV line rises, indicating that buying pressure has increased. When both OBV and price are making higher highs and higher lows, the upward price trend is likely to continue.
When volume on down days outstrips volume on up days, then the OBV line descends, indicating that selling pressure has increased. When both OBV and price are making lower highs and lower lows, the downward price trend is likely to continue.
Divergence is a situation where price movement is not confirmed by the OBV chart and may indicate a potential trend reversal. For example, a negative divergence where the price continues to make higher highs and OBV fails to make higher highs signals that an upward price trend is about to stall or reverse. Conversely, a positive divergence where the price continues to make lower lows and OBV fails to make lower lows may signal that the downward trend may be about to stall or reverse.
The OBV chart can often provide clues as to the intent of market players before the price action generates a buy or sell signal. This insight is particularly useful for traders considering entries or exits close to known major price support/resistance levels or trades close to price levels as indicated on the asset’s Fibonacci Retracement chart.