OBV Deep Dive

Advanced Lecture 2.2 - OBV Deep Dive


The standard volume indicator assumes if a bar went up that it was buying during this time period
On Balance Volume is an indicator which shows the cumulative volume. Every time the close was above the previous close we add volume and every time the close was less than the previous close we take away volume and you get a line. When price goes up the line goes up and when it goes down the line goes down.
You can see a difference in the lines based on the closing price of the candles you use. If you use Japanese candles you get a different result than if you use Heiken Ashi candles. The HA gives a better picture of the trend.
What you will then see is things like this: price makes a HL and the OBV makes a LL or flat. The explanation for this is an attempt was made to push the price down with large volumes by the market makers. The algorithm deals in large volume. It is how it delivers price.
In the example there is large volume selling but price could not go down. This is relative strength. It is a bullish divergence In our case we could call it a hidden bullish divergence

We have four types of divergence:

Regular Bullish Divergence = indicator makes a HL and price makes a LL

Hidden Bullish Divergence = indicator makes a LL and price makes a HL

Regular Bearish Divergence = indicator makes a HH and price makes a LH

Hidden Bullish Divergence = indicator makes a LH and price makes a HH


In an uptrend on a particular TF if a reversal is due you are likely to get a hidden bearish divergence. The indicator makes a LH and price makes a HH. This will be followed by the indicator making a HL and price making either a LL or a HL. If both make a HL it’s nothing but if the indicator makes a HL and price makes a LL you have a regular bullish divergence and it will give you continuation.
You should train yourself to spot any of the four and treat them with either one of the following classifications:
The first is to treat them all the same whether they are regular or hidden and use the same protocol when dealing with them
The other way to look at it is that the OBV itself is able to provide you with market structure.
When the OBV is showing LLs and LHs I will pay more attention to bearish divergences.
When the OBV is showing HHs and HLs I will pay more attention to bullish divergences.- I am not saying that you can't trade bearish divergences but when I am my expectation is purely the mean of previous P&D nothing lower.
When I'm dealing with a bullish divergence in an uptrend I maybe able to leave a bigger runner.
When I'm dealing with a bearish divergence in a downtrend I will be able to leave runner.
If you study the OBV and structure you will find that OBV validates a lot of your manipulation.
The concept of SSMT being between two quarters is applied to the OBV as well. The divergence has to happen across two quarters.
Go down to the TF where it happens and that is your trade. You will know immediately how long you expect the trade to last, what kind of profit you should be looking at and you won't be treating a 5m divergence between two 90m cycles aiming for a weekly target.
When you look at the quarters, pick the high in each one. You then compare the OBV at those exact points not necessarily at the OBV highs in those quarters because they are EMAs and there is a delay.
When you use the OBV as a ribbon the feint lines are the lower EMAs and the bigger lines are longer EMAs.
When price is below the longer EMAs you are in a downtrend and when price is above it's in an uptrend.
How long of a duration you can expect the move to last will depend on which of the EMAs there is a divergence with.
If there is a divergence with the shorter term EMAs it will likely be a shorter move.
If there is a divergence with the longer term EMAs it will likely be a longer move.