Balance of volumes (OBV)
The volume balance, known in English as on balance volume, is a technical indicator used in stock market analysis that relates the stock market volume with the changes in the price.
The objective of this indicator is to see if the movement of the price is accompanied by the volume. That is, if the price is rising, the indicator must increase in value. In the same way, if the price is falling, the indicator should reduce its value. That is, indicator and price must go in the same direction.
The logic behind this is that when a security rises, the interest in the security must increase, and consequently so must the volume. Whereas if the value falls, the interest in the security must be reduced and, therefore, also the volume.
Its appearance is as follows:
Volume balance formula
The way to calculate it is very simple. If the current closing price is above the closing price of the previous period, the current volume is added to the previous volume value. In contrast, if the current closing price is below the closing price of the previous period, the current volume is subtracted from the previous volume value. In the event that the closing price is equal to that of the previous period, the indicator does not change.
Like any technical indicator, the volume balance has a formula that results in a graph like the one in the previous image. The indicator formula is as follows:
Where "t" is the current moment and "t-1" is the previous period. In short, if the candle is bullish they are added and if the candle is bearish they are subtracted.
Interpretation of the indicator
As we explained at the beginning, the idea is simple. If the indicator moves in the same direction as the price, a good sign, the trend is healthy. On the contrary, if the indicator moves in the opposite direction to the price, a bad sign, the trend may be close to ending.
At this point, we are going to explain how it is used in most cases. The main use of this indicator is based on divergences.We can differentiate between bullish divergences and bearish divergences.
- Bearish divergences
A bullish divergence in the balance of volumes occurs when the price moves higher and the indicator falls. When this happens, it means that institutional money is coming out of value.
The price rises because the security has become popular and the less well-informed investors rush to buy it. But the reality is that the value is not really attractive.
- Bullish divergences
A bearish divergence in the indicator occurs when the price moves lower and the indicator moves higher. At this point, institutional money is beginning to enter value.
In other words, investors with more capital and who are better informed begin to buy large amounts. The price falls due to the panic of small investors who believe that the value will never stop falling.
In short, it is an indicator that tries to identify the entry or exit of strong hands. In trading lingo, the strong hands are institutional investors. That is, investors with more capital and better information.