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On-balance volume (OBV) is a technical indicator that focuses on market momentum and uses volume flow to anticipate changes in the prices of an asset. Although the indicator was created in 1963 by Joseph Granville as a metric to discover stock market opportunities, it's since been utilized to significant effect away from traditional stocks among cryptocurrency investors.

Granville hypothesized that volume was an essential force driving traditional markets, and OBV was his solution to anticipate better when major moves would occur based on volume changes.

So, this is how on-balance works in detail and how you can use it for your trading strategy.

According to Granville, OBV is like "a spring being wound tightly" because when volume increases sharply without a stock's price changing, the stock's value would eventually jump upward or fall downward. This highlights one of the more curious facets of on-balance volumethe actual value of the metric isn't particularly important.

For stock market and cryptocurrency traders alike, the most critical indicators to look out for are based on direction. This can provide a range of high-quality insights regarding buy and sell opportunities, helping with your fundamental crypto analysis.

With this in mind, there are many ways to interpret OBV based on its readings:

Considering this information, we can use the past 12 months of Bitcoin's on-balance volume to see how the indicator has helped anticipate new trends. While the values associated with BTC's OBV can rise and fall in line with the value of the asset amd its candlestick patterns, we can see evidence of downward trend signals and even negative divergence in recent months.

With OBV data serving as a credible indicator of what may be occurring in the short-term future for cryptocurrencies, it can be a valuable asset for investors to utilize before making trading decisions. If OBV indicates that a downward trend is likely to reverse and vice versa, it can make for an excellent buying opportunity.

The many momentum indicators that on-balance volume can provide traders mean that it can be an essential tool in discovering ideal entry and exit points for a cryptocurrency or as a robust confirmation tool to aid other trading strategies.

When looking at OBV in relation to price movements, it's possible to discover divergences that could indicate trend reversals for assets. On top of this, there are many ways that traders can utilize OBV.

When a strong trend is discovered in OBV, it can be best to follow it for better insights. If the on-balance volume rises, then the price is likely to go up, but OBV can also help traders discover possible divergences through the data. This means that the metric can stipulate the potential strength of a trend and its eventual end, which is great for investors seeking an exit point in a position.

Before making a trade, you can then use this data indicator to confirm the trends you see on other analysis tools. Alternatively, if you don't understand what's going on with one of your other tools, you can use OBV to analyze the trend you see.

Although on-balance volume can offer good data-driven guidance for traders, it's best to combine the indicator with other tools like moving averages or momentum indicators. This can help you to connect your insights with market sentiment.

As with traditional trading, combining indicators can help you gain as complete a picture as possible before deciding to trade.

Divergences can be one of the most essential things for crypto traders to look out for. When the price of an asset moves in one direction while OBV goes in another, this may indicate that a trend is about to end. This means it can signify to traders that it's time to take profits or identify an exit point.

A bullish divergence occurs when the price of a security is making lower lows while OBV is making higher lows, while a bearish divergence is when an asset is making higher highs but OBV is making lower highs.

For traders, it's essential to use on-balance volume to inform decisions on divergences to spot the best opportunities to buy and sell an asset.

The great thing about on-balance volume is that it's a relatively easy-to-use indicator that can be paired with other predictive indicators like the Bollinger bands or the triple threat combo to spot possible breakouts in price.

Although it's a great tool to inform decisions, you must not solely let OBV make your decisions for you. For instance, whales can easily manipulate market movements due to their funds. This could lead to a significant spike in trading volume that throws OBV off in the short term.

As always, look to build a complete picture with other tools. The world's best traders are always well-informed, and OBV can complement a more holistic view of crypto trading.

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What Is On-Balance Volume and Why Is It Essential to ... - MUO - MakeUseOf