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“Smart money” is sometimes heard in different discussions regarding the On-Balance Volume. According to a number of momentum traders, by using it to analyze technical charts, foreign exchange trading becomes a notch simpler. With it, you can start bringing in smart investments. Alongside, it can help you spot changes of sorts in price action clearly. In determining whether you have good odds once you enter the forex market, it seems the tool you need.
What Is the On-Balance Volume Indicator?
The On-Balance Volume or OBV indicator, introduced in 1963, is a momentum indicator that allows measurement of both positive and negative volume flow. Its developer, Joseph Granville, in his book Granville’s New Key to Stock Market Profits, discusses that the tool is meant for identifying major actions in the forex market. Moreover, it stays true to the concept that every time a significant rise in volume is observed, it won’t be long before the price follows its pace by either going in an upward or a downward direction dramatically.
A Little More Explanation of the Theory
The OBV indicator can point out a grand change in market activity. With it, it is asserted that once various institutions (e.g. investment funds, pension funds, and major trading establishments) begin acknowledging the idea that retail investors are selling, volume will increase regardless of current price levels. Consequently, such institutions will retire from their positions over time, and conversely, retail investors will use it as leverage by accumulating funds from their positions.
It’s Not Difficult to Understand
Since the OBV indicator is sometimes confused with the Accumulation/Distribution Line and the Money Flow Index indicator, novice momentum traders think its concept can be complex. Contrary to the false assumption, however, the essential elements, namely trading price and trading volume, simply have to be identified. Once these figures are in place, a running OBV can be established.
A Note worth Remembering
In summation:
- If today’s closing price is equal to yesterday’s closing price, it means’s today’s OBV and yesterday’s OBV are equal
- If today’s closing price is less than yesterday’s closing price, it means a decrease to yesterday’s OBV, courtesy of today’s volume
- If today’s closing price is greater than yesterday’s closing price, it means an addition to yesterday’s OBV, courtesy of today’s volume
The OBV indicator yields a cumulative result. The initial part of the calculation will affect the sum in later portions. Since it revolves around the notion that there are days when the volume is notably higher or lower on certain days, the tool can detect both minor and major price changes.
References: Technical points are taken from
http://www.investopedia.com/articles/technical/02/010702.asp and http://www.admiralmarkets.ae/education/
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