Trading Crypto with On-Balance Volume Indicator - Crypto Academy / S5W4 - Homework Post for @fredquantum.

In 1963, a man called Joseph Granville came up with an idea that resulted in the creation of the OBV indicator. The indicator deals with volume because most times, the price action of an asset follows the direction of the volume, and we can say that the volume of the asset proceeds its price in such a scenario. This is the theory Granville propounded. This is not all that the obv does. It can also be used to measure the cumulative buying and selling pressure by subtracting and adding volume on down and up days. So we can say that the obv indicator measures the positive and negative volume flow of an asset

With the obv indicator, traders can predict the market movement and observe the divergence between the price and the indicator before taking a trade. For instance

With all this being said, we can say the volume plays a big role in the price movement. If traders storm the market with a positive vibe and start buying massively, the volume would increase, and this would affect the price because there would be a bullish movement and the price goes up. On the other hand, if the buying reduces, and traders are selling off their holdings, the price plummet. This is the power of buying and selling. Thus, the obv serves as the future indicator that can help a trader determine the next trend and prepare to either get out of the market or enter a new trade because the obv would give an insight on the next price action

Using the tradingview platform, I would explain how the On-Balance-Volume indicator is set up on a chart. Using the BTC/USD pair, let's see how this is done on the platform

The first thing is to login to tradingview.com and select a trading pair. Once we've opened up the chart, we would click on FX as shown in the image. The page that comes up is the indicator page where we can select or search for different indicators. On the search option, input OBV, and click on it. It would reflect on the chart. It's as simple as that. We can change the colors as well and do some other settings if we wish but the default setting is what would display. I prefer changing the color of the indicators line most times

The market volume determines the price of an asset and also has a lot to do with how the obv line moves. The trend confirmation using the obv is noticed when the asset trend makes multiple higher tops and lower bottoms. The equity curve would go zig-zag, but it would be in an uptrend movement. So we can say when the asset is going bullish, the on-balance volume would move in the same direction as the price making various higher highs and lower lows. Let's see the image below

Conversely, when the price of an asset makes multiple lower tops and lower bottoms or lower high and lower low, that can be seen as a downtrend confirmation where the price of an asset would come down as the obv line move in the same direction as the price drops down

Using obv as trend confirmation is clearly noticed because the market volume determines the price and when the obv line is said to be on the same phase with the price movement or very identical (either uptrend or downtrend), it's easy to spot the trend confirmation because either way, the volume is supporting the price movement and traders can follow the ladder to make some dosh by following the trend but must be careful to exit at the right time

When we talk about the breakout, we are simply referring to a sudden change in the direction of movement beyond an expected range. The OBV can be used to spot a breakout in either direction when the price of an asset breaks the support or the resistance level and continue the trend in the same direction. At this point, we can call this a bearish or a bullish breakout depending on the direction of movement

The image above shows a bearish breakout. We can both see the same movement in the chart and the obv. So we can get the info from the obv that there is a bearish breakout as the volume decreases, so traders can take advantage of this period after the support was broken and was validated by the obv indicator

The bullish breakout also shows the same thing, but oppositely. Volume increases drastically after some periods of indecision in the market and there was a bullish price breakout. We can see from the chart that the price movement and the obv line go in the same direction indicating that the volume affects the price in an upward manner. So this breakout is a confirmation that the price is going up because the obv also confirms it

I talked about the price of an asset and the obv moving in the same direction and at the same pace without anyone slowing down. But there are times when the obv line would move faster than the price. When the price of an asset is struggling to breach the high previous top or bottom, and the obv already did, we can confirm that there's is an advance breakout. This normally happens when the volume in the market increases dramatically and whenever such occurs, it's a confirmation that the price would cross the previous high or low depending on the direction of the trend. So when we see anything like this on our chart, we should understand that it's a sign of strength and we can utilize the opportunity to enter the market and exit on time

When the price of an asset moves up or down and the indicator opposed the movement, that is called a divergence. So what is bullish and bearish divergence?

BULLISH DIVERGENCE WITH ON-BALANCE INDICATOR

A bullish divergence occurs when the price of an asset on the chart starts moving downward but on the other hand, the obv indicator goes against the movement i.e going up instead. Most times when this happens, it's an indication that the price would move up and go bullish because the obv indicator has shown the next price action. What causes this to happen sometimes is when the bears are injecting into the market and the bears are weakened.

Divergence occurs when a stronger wind moves away from a weaker wind or when air streams move in opposite directions. When divergence occurs in the upper levels of the atmosphere it leads to rising air.

We can from this understand why divergence occurs between the chart and indicators. So in the case of the bullish divergence, the bulls start dominating and eventually separate themselves from the bears, which led to the rising in the price of the asset. The traders can use this measure to determine the next trend or price direction and go for a buy. No matter how long a divergence is, it would later be corrected and the price movement would move in the same direction with the indicator line

image is a screenshot from my binance account

The image above shows the bearish divergence. When the price keeps moving up, the obv line moves in an opposite direction which portends the future movement of the asset price.

image is a screenshot from my binance account

The bullish divergence speaks the opposite of the bearish divergence. When the price of the asset moves down, the obv line goes in the opposite direction.

Question 8

Confirm a clear trend using the OBV indicator and combine another indicator of choice with it. Use the market structure to place at least two trades (one buy and one sell) through a demo account with proper trade management. (Screenshots required)

Using obv trend confirmation, with the moving average, I placed two trades based on the direction of the price and the market volume. The first trade I placed was sell.

For sell

I discovered that the price of the asset starts decreasing because the traders have started selling which caused a decrease in volume. So the obv line moves in a bearish direction and the other indicator used (moving average) confirms the bearish movement as the lines remain above the price without showing any sign of crossing over. And besides, the price made multiple lower low as it comes down, and I used a 1:1 reward ratio to minimize huge loss in case of a bad day trade. Here is an image below

Screenshot from tradingview

Screenshot from tradingview
^{Sell trade using obv indicator}

For Buy

Still using the trend confirmation for the buy order using the obv indicator accompanied with the moving average. The price of the asset has made multiple higher highs and the trend keeps going up, so I followed it using a 1:1 reward ratio. The obv indicator shows a bullish movement and the moving average remains below the price showing a bullish movement. See the images below.

Screenshot from tradingview

Screenshot from tradingview
^{Buy trade using obv indicator}

Question 9

What are the advantages and disadvantages of On-Balance-Volume Indicator

Advadvantages

• The obv is a good indicator that can be used for predicting the price movement of an asset in both ways either up or downtrend

• It gives the trader an insight on when and when not to enter a trade. When the market is ranging, trending, or retrenching, traders can wait and read the volume of the asset injected into the market and the direction of movement of the obv line to determine when to place a trade

• The obv is good for identifying breakout and divergence. Bullish and bearish divergence really occur, so when this is spot, it's an advantage for the trader. Obv is good at spotting bullish and bearish divergence and also knowing when the price is breaking out in either direction.

Disadvantages

Every indicator has the good and the ugly side. In the case of obv, it has a leading reading, which makes it a leading indicator and if not properly analyzed, can give a trader a false signal. That's why it's always advisable to use it with a lagging indicator like a simple moving average.

Conclusion

It's said that without any volume ascribed to an asset, there can never be a price movement. This makes the obv indicator very unique because it's built around the volume. Technical indicator tools are there to guide the traders. We can use them to predict the price movement and spot fake signals. The obv indicator works well but can be used with other technical indicators for more accuracy because using only one indicator might not be perfect enough to give us the right signal. Also, when we use these indicators, we must understand that they are not 100% perfect because of the market volatility, however effective, so we should always remember to manage risks.

Thanks for reading, and a big thank you to the prof @fredquantum for the wonderful lectures and the homework. Gracias.

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