The On balance volume or OBV for short, uses volume flows to predict changes in the underlying asset. The idea is that when an assets volume jumps up with no serious price change immediately - that the price will move consequently. This is similar to the accumulation distribution line in that the indicator is volume dependent.
What is the On Balance Volume
The OBV is a whale indicator as it looks for larger institutional trades as indicators of the smart money moving into a particular asset. As the larger traders come into a market and the price is met by sellers and there is no change it indicates a change in the volume flow.
How does the On Balance Volume work?
The on balance volume is a running total of volumes.
Closing price is above the prior close price then:
Current OBV = Previous OBV + Current Volume
Closing price is below the prior close price then:
Current OBV = Previous OBV - Current Volume
Closing prices equals the prior close price then:
Current OBV = Previous OBV (no change)
Example Chart On Balance Volume and Analysis
If you at the Ether BTC price chart you can see a clear period where the on balance volume turns from a negative to positive gradient as volume upticks and the price follows into a strong bull market. The second red section shows a reversal in the on balance volume from a positive trend to a negative trend and the price begins to fall.
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