Trend Trading: The 4 Most Common Indicators ( On-Balance Volume (OBV) ) (part4)

On-Balance Volume (OBV)

Volume itself is a valuable indicator, and on-balance volume (OBV) takes a significant amount of volume information and compiles it into a single one-line indicator. The indicator measures cumulative buying and selling pressure by adding the volume on "up" days and subtracting volume on "down" days.4
Ideally, the volume should confirm trends. A rising price should be accompanied by a rising OBV; a falling price should be accompanied by a falling OBV.4
The figure below shows the shares of Netflix Inc. (NFLX) trending higher along with OBV. Since OBV didn't drop below its trendline, it was a good indication that the price was likely to continue trending higher even after the pullbacks.

If OBV is rising and the price isn't, it's likely that the price will follow the OBV in the future and start rising. If the price is rising and OBV is flat-lining or falling, the price may be near a top. If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom.4

The Bottom Line

Indicators can simplify price information, in addition to providing trend trade signals and providing warnings about reversals. Indicators can be used on all time frames, and for the most part, they have variables that can be adjusted to suit each trader's specific preferences. Traders can combine indicator strategies–or come up with their own guidelines–so entry and exit criteria are clearly established for trades. Complementary trend indicators include pairing the MACD and stochastic. Another popular pair is the stochastic oscillator combined with the Average Directional Index (ADX) indicator.

Learning to trade on indicators can be a tricky process. If a particular indicator appeals to you, you may decide to research it further. Most importantly, it's a good idea to test it out before using it to make live trades. For those who have never actively traded before, it's important to know that opening a brokerage account is a necessary first step in order to gain access to the stock market.