OBV also helps to understand the accumulation and distribution pattern of prices and can be used to identify breakout and breakdowns in the near future. Rising OBV during a trading range indicates accumulation, which is bullish; falling OBV in a trading range indicates distribution, which is bearish.
“Sweet sugar” (below) includes a daily chart of sugar along with OBV. Sugar is trading in a range of 16.70¢-17.90¢ for almost 20 trading sessions. However, OBV has been rising while prices are trading in range. As we can see, a bullish breakout soon happened, with sugar reaching a high of 20¢.
OBV also is a good confirming trend indicator. Once a trend is established, it remains in force until it is broken. OBV can be used to confirm an existing price trend, an upside breakout or a downside break. “Gaining ground” (below) shows how the higher price trend for Apple coincided with a rising OBV, hence confirming to traders that strength was behind the market.
OBV is a simple technical indicator that uses volume and price to measure buying and selling pressure. Buying pressure is evident when positive volume exceeds negative volume, and the OBV line rises. Selling pressure is present when negative volume exceeds positive volume, and the OBV line falls.
Traders can use OBV to confirm the underlying trend or look for divergences that may foreshadow a price change. As with all indicators, it is important to use OBV in conjunction with other tools of technical analysis. OBV should not be used as a standalone indicator for signaling trade entries or exits. Good indicators to use in conjunction with OBV include pattern analysis and momentum oscillators.
Bramesh Bhandari writes at www.bramesh-techanalysis.com and provides online tutoring on technical analysis. He can be reached via email at email@example.com.