When it comes to trading, it’s all too easy to find plenty of indicators, each with its own entry/exit signals, overbought/oversold zones, squiggly lines and more. But as any experienced trader would say—whether they’re trading equities, forex, bonds or crypto—relying on too many indicators will only leave you with a cluttered chart and equally cluttered mind.
Rather than trying to figure out how many of the 10 indicators you’ve got need to be confluent to enter a trade (or how many monitors you need to properly see all of them), it’s better to just master the basics, namely price and volume. Then, you can pick a couple of indicators to master, but there’s no shortage of successful traders that have spent their entire careers without using anything other than these bare basics.
We’ve talked about what to look out for on the price chart in other posts (and you can also find out more in our Academy), so today we will focus on the other key component, namely volume, as well as the On-Balance-Volume (OBV) indicator, which is derived directly from trading volume. Volume is simply the number of assets that change hands in the course of a specific trading interval, and it’s often represented as a bar graph below the price chart. For example, here’s a daily chart of Bitcoin/USDT on Binance:
The volume on the selected candle (1 March 2021) is 85.086K (which you can see on the upper left, below the symbol name). This means that, in the course of that day, just over 85 thousand BTC was traded on Binance. Also, the volume bars are colored red or green depending on the color of the candles (in case you’re not familiar with candlestick charts, you can read more about them here).
So what does volume tell you? First of all, it reveals how much participation there is in a particular price move. So, when price trends up or down along with increasing volume, this signals that the trend is healthy and likely to continue, whereas volume decreasing can mean that the trend is exhausted and likely to reverse. This is also visible on the chart above: volume became very low in March and April, just before price broke down. The same goes for breakouts from chart patterns in either direction: the more volume they’re accompanied by, the more reliable they tend to be.
To get even more information from volume, one useful way of looking at it is via the OBV indicator, which displays volume data as a single line. It’s probably the simplest indicator out there when it comes to its formula: the OBV is calculated simply by the addition of each volume bar to the sum of all preceding bars (with red bars being negative). There are two main ways to use the OBV: divergences and patterns.
When it comes to divergences, the OBV can be used just like the RSI: if the price is making new highs or lows, but the OBV isn’t, that’s a sign that the trend is likely exhausted. In fact, many consider OBV divergences to be even more reliable than on the RSI, as the OBV is a direct measure of participation, and thus the strength of the trend.
The OBV can also be used similarly to price action itself, namely in identifying support/resistance levels, trendlines, patterns and more. The reason this can be particularly useful is the fact that the OBV can break out before the price does. Take for example the chart above: both price and OBV are showing a Bump-and-Run Reversal (BARR) pattern, which is considered confirmed once there is a close above the trendline. But, whereas price broke out on August 6, the OBV did so already on July 24! Of course, the OBV breakout on its own isn’t a substitute for a price breakout, but it’s an extremely important leading signal that can help you get positioned very early.