Master-Class on OBV indicator.

OBV is an indicator which measures volume flow.

It is the simplest volume indicator but the most useful to confirm price trends.

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A Thread.
OBV Stands for On Balance Volume.

It shows the buying or selling pressure.

I discovered OBV in the Book
'New key to Stock Market Profits'

Let's understand how its calculated.

YOU MUST understand how it's calculated to use it.
New traders don't bother to understand how the indicator is derived.

This is a fatal mistake as it makes the information useless mostly.

OBV is calculated by
Adding volume to the indicator when the price goes up.
Subtracting volume from the indicator when the price goes down.
To conclude, whenever the price shows a positive move, volume is added to the indicator.

Whenever the price shows a negative move, volume is deducted from the indicator.
Use of OBV.
In its simplest form, it's used as a volume influx confirmation tool. Period. As simple as that.

Whether a trend is confirmed by volume or not, is what the OBV can help us with.
If a trend isn't confirmed by OBV, it means the Volume influx is opposite of what the price shows, causing a divergence.

A divergence is caused when the price and the indicator show an opposite strength.

We can expect a move in the opposite direction, soon enough.
Situation 1
Price of Bitcoin goes up
OBV also goes up

We can see a positive correlation between price and Volume.
This is a clear and simple scenario that will occur 99% of the times.

The same can happen when price goes down and OBV goes down. Again, a positive correlation.
Before we go into divergence, we first need to understand why volume is important.

Price is set by auction.
The charts show a Continuous auction where prices are advertised to Interested parties for buying and selling.
The asset price is determined by what the market in thinks the asset is worth.
Market is made up of all the individual buyers and seller, i.e. Auction participants.

Hence the market makes it impossible for one individual or a small quantity of asset to alter the entire market.
Eg. In the farmers market, 10000 lemons were sold at 1 dollar a piece.

A seller comes and sells 1 lemon at 10 dollars a piece.

What do you think the price of lemon is?

Of course 1 dollar a piece.
The one dollar sold by that one seller is an outlier, a divergence.
The quantity, the amount of sale(volume) doesn't match the price increase.

This is why Volume is important and this is what divergence is.

Low volume trades = Lower acceptance
Situation 2.

A divergence is when the price and OBV aren't correlated.

In an uptrend divergence, the prices could be expected to go lower in future and the opposite for the downtrend.
In a similar manner, again the OBV warned about a weak uptrend which led to a dump.

Lesser volume pumps means low net volume flow into the market.

The same exact is true for downtrends.
I am not giving separate example or else the thread will become too big.

1. Whenever entering a long or short after a trend, confirm with OBV if the trend is supported by influx of Volume.
2. When price is breaking out, confirm with OBV the Breakout or breakdown volume.
3. If divergences exit, be careful.
Something to keep in mind.

In low liquid market like Crypto, a single candle can have a huge volume which can sometimes give a distorted picture of the OBV.

Hence like all indicators, OBV is not perfect.
This covers OBV in detail and as much as necessary.

I hope you found this useful.

Please RT to help everyone new to trading.

I will be making
How to day Trade Bitcoin tutorial so be ready.
Also, thanks to Delta for making the threads possible through my assistant.

I promise to keep sharing the best trading tutorials as fast as possible. For free, as they should be.

You can help by Signing up at Delta & trading there
🚨Attention Friends🚨

There is a slight correction in tweet no. 11.

I meant to say one lemon instead of one dollar.

One Lemon sold at 10 dollars is the outlier.

Apologies for MY typo.
My assistant did nothing wrong.

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