Technical analysis tools comprise of direct analysis tools, such as price action and support and resistance lines, and indirect analysis tools, such as Relative Strength Index. Another indirect analysis tool is On Balance Volume (OBV), which measures the change of volume.
Volume in trading is very important. When the price of an asset experiences a significant move, the volume can identify whether that move will keep going or will become a fake out.
If the move is supported with high volume, then it is usually the beginning of a strong trend. If there is little volume, then it might signal that the price is actually going to turn in the other direction.
Volume is a direct analysis tool, but On Balance Volume (OBV) is an indirect tool. It measures the change in volume, or in other words the change of the buying and selling pressure.
If the OBV indicates that buying pressure is increasing, it means the price can continue going up or reverse and go up from a downtrend. If the OBV indicates that selling pressure is decreasing, then the price can keep going down or reverse down from an uptrend.
How On Balance Volume Works
OBV was developed by Joe Granville. He wrote about it in his book “Granville’s New Key to Stock Market Profits” written in 1963. The formula for calculating the OBV is as follows:
If the closing price is above the prior close price then:
Current OBV = Previous OBV + Current Volume
If the closing price is below the prior close price then:
Current OBV = Previous OBV — Current Volume
If the closing prices equals the prior close price then:
Current OBV = Previous OBV (no change)
source: stockcharts.com
Other than convergent relations, where price and OBV goes in the same direction, On Balance Volume can also give divergent relations with the price movement.
If the price movement is going down, but the OBV is trending up, then that is a bullish divergence. It signals that the price has a possibility to change directions and enter a bullish trend.
On the other side, if the price movement is going up, but the OBV is trending down, then that is a bearish divergence. It signals that the price may reverse and enter a bearish trend.
It’s also possible for the price to be in a certain range, moving sideways. If the OBV is trending down, then the price may fall down. If the OBV is trending up, then the price might break out.
Analysing Solana with OBV
Looking at the SOL/BTC chart, the price of Solana (SOL) is moving in a range against Bitcoin (BTC). However, the OBV line is showing a downtrend.
Therefore it’s possible that Solana will continue to depreciate against Bitcoin for some time. Traders could open a short position for SOL on BigoMex if the price breaches the support level below.
Opening a position in BigoMex requires only a minimum margin of 2 USDT. Traders with small volume can test the OBV analysis with a small amount of money to prove the concept.
