On-Balance Volume (OBV) is a momentum indicator that combines price and volume to assess buying and selling pressure in a financial asset. Here's how to interpret it:
Understanding OBV: OBV is based on the principle that volume precedes price movements. It adds a cumulative total of volume on days when the price rises and subtracts the cumulative total of volume on days when the price falls.
Interpreting OBV Trends:
Confirming Price Trends: OBV is often used to confirm price trends. If the price of an asset is rising, but OBV is declining, it may signal weakness in the uptrend, as it suggests that the buying volume is not sufficient to sustain the price rise.
Divergences: OBV can also be used to identify divergences between price and volume trends. For example, if the price of an asset is making new highs, but OBV fails to confirm these highs by not making new highs itself, it may indicate a potential reversal in the price trend.
Breakouts and Support/Resistance: OBV can help identify potential breakouts or breakdowns. A breakout accompanied by rising OBV suggests strong buying interest and validates the breakout. Similarly, if the price breaks below a support level with increasing OBV, it may confirm the validity of the breakdown.
Volume Spike Analysis: Sudden spikes or surges in OBV can provide valuable insights. A sharp increase in OBV often precedes significant price movements, indicating increased buying or selling pressure.
Confirmation with Other Indicators: OBV is often used in conjunction with other technical indicators to confirm trading signals. For example, it can be paired with moving averages or oscillators for additional confirmation.
Remember, like any technical indicator, OBV is not foolproof and should be used in conjunction with other forms of analysis to make well-informed trading decisions. Additionally, it's important to consider the context of the market and other factors influencing price and volume movements.