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What is On Balance Volume & How to Use it

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On Balance Volume...

Used as a technical trading momentum indicator, the on balance volume indicator was developed by Joseph Granville in 1963. The OBV uses volume flow to predict changes in a currency's price.

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What is it?

The indicator was developed to project when major moves in markets would occur based on volume changes. The OBV indicator provides a running total of a currency’s trading volume and shows whether this volume is flowing in or out of a currency pair.

The indicator is a cumulative total of volume. By tallying up and down volume, and adding or subtracting the result in a continuous sub-total, the OBV generates a smooth indicator line that carves out any highs, lows and trendlines, in a similar fashion as price bars.

How to Use it

On balance volume indicator produces clearer signals to support investors seeking to act on a trade. Volume shows crowd sentiment as price bars carve out patterns that predict bullish or bearish outcomes.

Convergence is evident when volume supporting price action is created, adding reliability to directional signals. Opposing actions are required to create divergence, signalling that market forces are in disagreement with one side eventually taking control. Volume that is interpreted through an accumulation-distribution indicator simplifies this process, giving trustworthy signals that impact position choices and trade management.

Traders who take advantage of the OBV indicator are usually less interested in its value and will pay close attention to its rate of change as this can indicate trade ideas. When the OBV is moving in one direction, it could indicate that a move in that direction in price is most likely to occur.

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