Volume Indicator: On Balance Volume
On Balance Volume is a tool that quantifies the strength of a price movement or trend. It helps you identify if it is weak or strong.
It is very easy to calculate:
If today’s price closes above yesterday’s price, then we give the volume a positive number. If instead today’s close is below yesterday’s close, we assign the volume a negative number. The close can be one also just one pence. The only thing that is important is the direction of the price, if it is up or down.
The volume is then added up, and an index is created.
For those spread betters that are mathematically minded.
Calculations:
OBV = ( (C-P) / |C-P| * V
Interpreting the On Balance Volume:
As Most Volume indicators, On Balance Volume can be used as a warning tool or confirmation tool.
Confirming tool
As you can see in the FTSE Daily Bet, The on balance volume is initially confirming your trade. The on balance volume is making new highs as the prices are making new highs. The On Balance Volume is confirming a strong uptrend in the FTSE 100.
There is a strong commitment from buyers.
Divergence: A warning tool
Instead in the other part of the FTSE Daily Bet, The on balance volume is showing weakeness as it is making lower lows while the FTSE makes higher lows. After the second peak you can see prices turn around and move lower.
The On Balance Volume has warned those spread better of a possible short, price reversal in the FTSE.
Charts** Not all spread betting platforms provide volume, thus you might not have the On Balance Volume. You will get this on private charting packets.
In conclusion, the On Balance Volume can be used as both a warning tool and a confirming tool.
It is important to add a volume indicator in your price analysis, other volume indicators you can use are the Accumulation Distribution, MFI (Money Flow Index), Chaikin Oscillator and the Price volume trend indicator.