On-Balance Volume | Bitcoin and Crypto Trading with Volume Analysis
- February 10, 2018
- Posted by: CryptoDerivativeTrading.com
Cryptocurrency / Bitcoin CFD trading explained here.
On-Balance Volume (OBV) and Volume Analysis beating technical analysis in Bitcoin / Cryptocurrency trading
Technical analysis in trading Bitcoin and trading cryptocurrency is used by traders in an attempt to forecast the next price move of Bitcoin and other cryptocurrency. The potential of technical analysis in the regular equity and currency markets are indisputable. The potential of technical analysis in the Bitcoin and cryptocurrency market is often doubted. Bitcoin and cryptocurrency markets have shown different behaviour than regular equity and currency markets. Besides often is said that most technical analysis does not work well in highly volatile markets. Bitcoin and cryptocurrency markets are considered highly volatile.
Lately, more and more, Bitcoin and cryptocurrency traders are concluding that volume analysis and volume indicators are more predictive and more recommendable tools in forecasting the next price move of Bitcoin and other cryptocurrency. At the same time volume analysis and volume indicators can be used understand better the behaviour of the market. Therefore volume analysis and volume indicators are winning in popularity by Bitcoin traders and cryptocurrency traders.
Volume analysis and volume indicators are methods for observing the buying and selling activity at (key) levels. The ability to assess what the volume in the crypto market is telling you, together with other factors, can be a deciding factor for your ability to turn a profit in the market. Never forget that volume indicators are not predictors of the future. They are simply one of the tools from the toolbox of the trader.
In this article the volume indicator of On-balance Volume (OBV) is discussed. The OBV is an indicator that uses volume flow in order to asses entry/exit positions for Bitcoin and other cryptocurrency. The OBV measures positive and negative volume flow. The OBV is a running total of up vs down volume.
Joseph Granville developed the On-balance Volume (OBV) in the 1960s. The hypothesis of Granville is that an increase in volume without a significant movement in the price would subsequently lead to a jump up/down in price. Granville hypothesised that volume was the driving force behind the markets, and designed the OBV to project when major movements in price would occur.
The mechanism behind the theory is that an increased volume without significant price change is followed by an up or downward jump in price. The entrance of smart money (Institutional Investors/hedgefunds) while retail investors are still selling will be correlated with an increase in volume. Over a period of time the volume of the entrance of smart money will win and therefore the price will go up. The converse will happen as smart money begin to sell their positions and retail investors begin to accumulate their positions.
The term “smart money” becomes clear at the same time. The institutions are buying Bitcoin and other cryptocurrency at the bottom when the retail investor is selling and then selling it back to him at or near the top.
The On-Balance Volume (OBV) is a running total of volume (both positive and negative). The OBV is basically the summary of the volume in an uptrend against the downtrend. When in a chosen timeframe the close was higher than the open, the volume is added to the indicator. The other way around, if the close is lower than the open the volume is subtracted from the indicator. The idea is that, when the volume increases sharply without a significant change in Bitcoin or the Cryptocurrency, the price will eventually jump upward and vice versa.
With the help of tradingview Volume profile is easily displayed on the chart together with Bitcoin or other Cryptocurrency.
Three rules are used when calculating the On-balance volume OBV:
- In case the closing price of the current chosen timeframe is higher than the previous timeframe: Current OBV = Previous OBV + volume of the current chosen timeframe
- In case the closing price of the current chosen timeframe is lower than the previous timeframe, then: Current OBV = previous OBV – volume of the current chosen timeframe
- In case the closing price of the current chosen timeframe equals the previous chosen timeframe closing price, then: Current OBV = Previous OBV
- In case the closing price of the current chosen timeframe is higher than the closing price of previous chosen timeframe, then the volume of the current chosen timeframe is added to previous chosen timeframe OBV and is seen as up volume.
- In case the closing price of the current chosen timeframe is less than previous chosen timeframe close, then the current chosen timeframe volume is substracted from previous chosen timeframe’s OBV and it is considered down volume.
- In case the closing price of the current chosen timeframe is equal to the previous chosen timeframe close then the current chosen timeframe OBV is equal to previous chosen timeframe OBV
The On-Balance Volume (OBV) is an excellent simple tool to give you a message about the underlying emphasis of a volume trend. Traders sometimes say that as a standard it is fine to use the OBV based on 50 chosen timeframes. As always how and when to use the information as given by the indicator as an indication of future price development is a matter of personal trading system, preference and experience. Also be always aware that the volume indicator does not take external developments and news in account. Therefore always keep a close eye on various developments in the markets.
If we have your interest on volume analysis please read here for another volume indicator namely: Volume Profile. Make an account at tradingview to easily display On-balance Volume (OBV) on the chart together with Bitcoin or other Cryptocurrency.
Cryptocurrency / Bitcoin CFD trading explained here.