You’ve tried everything and are about to give up on Day Trading and Swing Trading until you discover a strategy that works, and you start to notice that big names in the financial market like Marcio Noronha, the father of technical analysis in Brazil, use the base indicator of this strategy. We’re talking about the OBV, an indicator in the oscillator category, a volume indicator, and a leading indicator that provides us with early signals.
This indicator can be used in various ways; it can show divergences anticipating a market reversal, it can break through a consolidation zone before the price itself breaks, I’ll show more about this later, and it helps confirm the strength of an uptrend or a downtrend.
A Strategy with OBV
But is it too good to be true? I’ll reveal a strategy with OBV, not just one, but several, but the best of them is the divergence, and this indicator is so good that it even allows you to remove volume bars from the chart, in the form of a histogram. You can even remove moving averages, remove everything from your chart, put only the OBV, and follow the step-by-step process that I’ll teach in this class.
But be careful, if you don’t get the whole explanation of all the applications of OBV, you’ll use it wrong for your whole life, so watch until the end, and I’ll reveal how to really apply strategies with OBV in practice, and you can use it in the stock market, cryptocurrencies, Forex, mini index, and mini dollar, and you choose the time frame that OBV will work, but never in isolation. I’ll show that the trigger for entering the operation is through Price Action using OBV support.
So I’ll start from scratch, for this to be the definitive OBV article.
Joseph Granville and the Volume Balance
The OBV is the Volume Balance; it shows whether money is coming in or going out, it even reveals the action of Market Makers, who are institutional investors. It’s a momentum indicator created by Joseph Granville in the 1960s and published in his book “Granville’s New Key to Stock Market Profits.” This indicator uses volume to predict price changes, also because volume precedes price.
Joseph Granville found that volume is the force behind the market, and he developed the OBV to project when large movements would occur in the market based on volume changes.
This Granville became famous because the calls he made were accurate, the most famous of them being {shows chart} on April 22, 1980, look how the market melted, Joseph Granville made a buy call. Or January 6, 1981, right at this top here, a sell call, in the following weeks, the Dow Jones returned $21 billion.
The Relationship Between Price and Volume
But what did he discover that made him so rich and famous, which is why you should read this text to the end, it’s something quite simple, he realized that when volume increases sharply but is not accompanied by a sharp change in price, the price will eventually rise, and vice versa, don’t worry, I’ll show it in detail here on the chart, but only after you give me a like, I’m waiting, the class will only continue after your like.
This indicator consists of a continuous line. Just that alone is very good for those who like a clean chart. It’s not one of those indicators like Ichimoku clouds that clutter the chart. It’s simply a line. Then Vicie says, “Caio, but the moving average is also a line, why learn to use OBV?” Dude, the moving average is lagging; it’s a Lagging Indicator, what I’m showing you here is leading.
Okay, and this continuous, cumulative line, I’ll explain why it’s cumulative, it shows us changes in volume, with the aim of predicting price changes, and the analysis of this line is always in comparison with the price, revealing divergences or convergences. That is, is the indicator and the price in disagreement or agreement?
Martin Pring and the OBV
This book in my hand is the best technical analysis book, not Joseph Granville’s, this one is by Martin Pring, and on page 555, he addresses the famous OBV indicator. Look what he says. “The volume for the day is added when the price rises and subtracted when it falls.” But you choose the time frame, the units of volume to be subtracted or added will be based on this time frame.
It works on all time frames, but on the daily one, there’s less noise than on the intraday one, like any indicator. And Martin Pring continues, “the OBV, therefore, offers a rough approximation of buying pressure and selling pressure (…) it is interpreted by comparing the line with the price, using divergences, trendline breaks, price patterns, and moving average crossovers to point out underlying signs of strength or weakness.”
A Divergence Indicator
So nobody gets lost, let me recap what a bearish divergence and a bullish divergence are, and this doesn’t just apply to OBV, it applies to RSI, or any other oscillator. If the price makes higher highs, and the indicator makes lower highs, we have a bearish divergence. If the price makes lower lows and the indicator makes higher lows, we have a bullish divergence.
Alright, simplifying everything that has been said so far, we’re here on the daily chart of a Brazilian stock, on up days, the traded volume is added to the Volume Balance, which is the OBV, and on down days, the traded volume is subtracted from the OBV. And if the market closes at zero, the OBV will remain unchanged, it will remain the OBV from the previous day.
The Calculation of OBV
So an example of how the calculation of OBV works:
Day 1: stock closed at $10, volume traded was 100,000, OBV = 100,000
Day 2: stock closed at $11, volume traded was 90,000, OBV = 190,000
Day 3: stock closed at $10.50, volume traded was 100,000, OBV
= 90,000
(On Day 2, if the price went from $10 to $11, it went up, so I add today’s volume to yesterday’s, giving an OBV of 190,000.
(On Day 3, if the price fell, I’ll subtract the volume, so 190,000 minus 100,000,)
Enough theory, man, my business is to make money, let’s see how to operate OBV combined with Price Action.
Watch the video:
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