THE SECRET TO ADVANCED VOLUME TRADING

ON BALANCE
VOLUME

A SIMPLE GUIDE TO
ON BALANCE VOLUME

BY: TDFX
TABLE OF
CONTENTS

01 INTRODUCTION

06 SETTING UP

07 Chart Patterns

11 OBV Setup

15 Risk Management

18 Divergence

21 Conclusion

22 Contact Information
Introduction
Introduction to On Balance Volume

On-Balance Volume (OBV) is a technical analysis indicator

that measures cumulative buying and selling pressure as a
volume-based metric. It was developed by Joseph Granville
and is used to predict market movements based on volume
flow. The core idea behind OBV is that volume precedes
price movements, meaning significant changes in trading
volume can signal future price changes.

What you will learn

The power of predictive trading

Stay ahead of market trends

Gaining an edge and master a

proven strategy

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 Power of OBV

The On Balance Volume (OBV) indicator has garnered

significant attention among traders, due to its potential to predict
breakouts and trends before price movements occur. Grounded
in the principle that volume typically leads price movements,
OBV serves as a reliable tool for identifying potential trends.

Moreover, its ability to pinpoint volume breakouts further

solidifies its reputation as a predictive indicator of trend
continuation. Traders recognize the power of OBV and frequently
integrate it with other technical indicators and analytical methods
to augment their trading strategies. With its comprehensive
approach to analyzing the interplay between volume and price
movements, OBV empowers traders to make well-informed
decisions in dynamic market environments.

Facts about OBV

OBV is developed by Joe Granville

OBV is used as a complementary tool. It is not all-in-one

indicator that will guarantee you financial freedom.

OBV is not foolproof. However, we will guide you step-by-step

on how to effectively utilize this indicator to achieve the best
win rate.

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 OBV is best know for its
flexibility to combine with
other trading indicator

Pattern Setup/Breakout - OBV can confirm patterns like head

and shoulders, triangles, and flags. If a price breakout is
accompanied by a corresponding breakout in OBV, the pattern
is more likely to be valid.

Volume Trading - Volume traders use OBV to identify periods of

accumulation (buying) and distribution (selling). A rising OBV
indicates accumulation, while a falling OBV indicates
distribution.

Trendline Breakout - OBV trendlines can be drawn similarly to

price trendlines. A breakout in the OBV trendline can precede or
coincide with a breakout in price trendlines, providing early
entry or exit signals.

Elliott Wave Trader - OBV can be used to confirm Elliott Wave

counts. In impulsive waves, OBV should move in the direction of
the trend, while in corrective waves, OBV might show
divergence or less momentum.

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 Guidance to your first
SETTING UP OBV Setup

What to
TradingView App
Prepare?...

Open TradingView, select your trading instrument

> Open indicators tab

> Search for OBV

> OBV indicator added, all set up!

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OBV Trading Strategy

The strategy
OBV trading strategy and chart patterns are the
main components in this strategy. Chart patterns
visually represent price movement over time and
help traders identify trends and potential reversal.
The integration of volume data with chart patterns
enhances the accuracy of market predictions. With
the theory volume leads price action, we can use
OBV to predict the breakout before the chart
pattern breaks out, allowing us to ‘predict’ the
market. This allows us to enter the market right
before price breakouts using the data provided by
OBV.

Chart patterns
Understanding chart patterns is essential in this
particular, as they provide critical insights into
market behavior and help traders predict future
price movements. If you're not familiar with chart
patterns, don't worry; we'll provide a brief tutorial
on the next page. Chart patterns are used to
identify continuation and reversal patterns, which
indicate whether a current trend will persist or
change direction. When combined with on balance
volume (OBV) trading, these patterns become
even more powerful, as OBV adds a layer of
analysis by considering trading volume alongside
price movements. Mastering these tools can
significantly enhance your trading strategy and
improve your decision-making process in the
financial markets.
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Chart Patterns

Continuation patterns

These are a few patterns that are commonly used in continuation trading

If you need more resources to understand, you can do your own research
about chart patterns

Chart patterns require some experience and skill to spot accurately in the
charts

Do not get discouraged if it is hard at first; practice makes perfect, and

identifying these patterns will become second nature as you get more
familiar with them

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Chart Patterns

Reversal patterns

These are a few patterns that are commonly used in reversal trading
Reversal patterns are harder to spot than continuation patterns.

High reward potential when entered correctly.

Don’t worry; OBV (On Balance Volume) will signal entry points before
the breakout.

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 Trading the
Chart Patterns

Pattern Example: Continuation Pattern

1) Identify the Pattern: Before trading a breakout, you need to identify a pattern forming on the price
chart. For this scenario it will be a continuation pattern.

2) Confirm the Breakout: After confirming we wait for the price to break decisively above or below the
pattern's boundary. This breakout should ideally be accompanied by any high trading volume or strong
movement. (For this scenario we will be looking for upward breakout movement).

3) Determine Entry and Exit Points: Once the breakout is confirmed, determine your entry and exit points.
You may choose to enter a long (buy) position if the breakout is to the upside, or a short (sell) position if
the breakout is to the downside. The entry point should be at the previous second touch of the pattern.

4) Set Stop Loss and Take Profit Levels: Place stop-loss orders to limit potential losses in case the trade
goes against you. Stop-loss orders are typically placed just below the breakout level for long positions
and just above the breakout level for short positions. Now you can set your take-profit target based on the
size of the pattern, previous price action, or other technical indicators.

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Putting it together
When trading, chart patterns are often accompanied by the On Balance
Volume (OBV) indicator to enhance the accuracy of predictions. Whether
identifying a continuation or reversal pattern, it is crucial to analyze the
corresponding pattern on the OBV. According to the theory that volume
leads price movement, OBV should show a breakout before the price
chart does. Although the OBV pattern might not exactly mirror the price
chart pattern, the resistance line for the breakout should align. This
synergy between chart patterns and OBV helps traders anticipate market
moves more effectively, providing an additional layer of validation for
their trading decisions. Examples illustrating this concept are shown
below.

Example
A continuation pattern is identified and
drawn on the chart

Check OBV for similar pattern and

draw the pattern

A and B of the chart pattern touches

the trend line, make sure that A and B
in OBV is also touching the trendline

C of OBV shows breakout, and there is

a delay in chart pattern, which shows
price is still within the pattern

This is a signal to go short, with

stoploss above high of C

With OBV, you would have entered

right before the breakout with a much
smaller stoploss, giving a greater Risk :
Reward

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Another example...

A continuation pattern is identified

Continuation pattern is both drawn on chart and OBV

A trendline that connects A and B is drawn on both

charts

C in OBV is broken, giving us a heads up price is going

to breakout

Enter short position at C in chart patter, right before the

price breakout

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Trade setup

A continuation pattern is drawn in

both charts

OBV shows breakout on the third

touch of the trendline

Enter long position, where price is

still inside the pattern

A continuation pattern is drawn in

both charts

OBV shows breakout on the third

touch of the trendline

Enter long position, with stop loss

below the nearest previous low

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Trade setup

A downtrend continuation pattern

is drawn on both trade

OBV shows breakout on the third

touch of the trendline

Enter short position, with stop loss

below the nearest previous high

A downtrend continuation pattern

is drawn on both trade

The pattern might be slightly

different, but what’s most
important is the trendline of the
breakout (lower trendline of both
patterns where breakout occurs)
must align

OBV shows breakout on the third

touch of the trendline

Enter short position, with stop loss

below the nearest previous high

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Risk management
How to control your risk

Risk management in trading is paramount, serving as the foundation of a

trader's long-term success. Over leveraging or risking too much of your capital
in one trade can have detrimental effects to your trading account. Remember, we
don’t focus on the outcome of one trade, but the result of many trades in the
long term. Therefore, using an appropriate lot size for every trade is extremely
important.

The general guideline is to risk no more than 3% per trade. We choose 3% for
every trade, because in case of a losing streak, it will not be as difficult to
recover your account.

It's crucial to remember that the more you lose, the harder it becomes to
recover. Traders often prioritize calculating their potential loss before
considering potential profits. Maintaining discipline and risking the same
amount for every trade is key. Before thinking about potential earnings,
consider how much you could lose and how that would impact your account.
This approach helps manage risk and ensures a more balanced trading
strategy.

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High risk and low risk
method entry

In trading, entry price filters and time filters are tools used to optimize
trade entries and manage risk. Price filter are generally higher risk, and
time filter are generally lower risk.

Price filter
Position is entered once OBV shows breakout, even though price is still
within pattern. This method of entry is susceptible to false signals by OBV.
Although most of the time price breakout is followed by OBV volume
breakout, there are some scenarios where price reversed although OBV
shows breakout. However, market entry using price filter has higher
potential reward as the stop loss is not as wide as time filter.

Time filter
Position is entered when OBV and price both broke out of the pattern. This
confirms the price is following the direction of the volume breakout, a
reversal is highly unlikely. This of course leaves us with a wider stop loss
and less profit potential but with a higher win rate. There is no best way of
entry between price and time filter, it all depends on which is more suitable
and more comfortable for the trader.

Reward
Risk
potential

Price filter High Low

Time filter Low High

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High risk and low risk
method entry

Stop loss A
Stop loss A
Stop loss B
Entry A
Entry A
Entry B
Entry B

Take Profit

Price filter : Entry A and stop loss A

Time filter : Entry B and stop loss B

Price filter would have reached 1:1.5 risk reward ratio when take profit
is hit whereas time filter would have reached 1: 1 risk reward ratio
when take profit is reached

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DIVERGENCE

In trading, divergence is a concept used in technical analysis to

identify potential reversals in price trends. It occurs when the price
of an asset and a technical indicator, often an oscillator like the
Relative Strength Index (RSI), Moving Average Convergence
Divergence (MACD), or Stochastic Oscillator, move in opposite
directions.

There are two main types of divergence in trading:

Bullish Divergence

Bullish divergence occurs when the price of an asset makes a new

low while the technical indicator makes a higher low. This suggests
that despite the price making new lows, the underlying momentum
is increasing, which could indicate a potential upward reversal.
Bullish divergence is often considered a buy signal.

Bearish Divergence
Bearish divergence occurs when the price of an asset makes a new
high while the technical indicator makes a lower high. This suggests
that despite the price making new highs, the underlying momentum
is decreasing, which could indicate a potential downward reversal.
Bearish divergence is often considered a sell signal.

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 DIVERGENCE IN OBV

The graph above shown is the correlation between OBV and

price level.
As you can see, the price level is slowly shifting down to a
lower level (in a pattern formation) while OBV is gradually
increasing.
In that case, we can highly assume that price is slowly losing
momentum but on the other side buyer is slowly increasing
their volume.
Thus, this results in buyer overpowering the seller causing a
strong upward movement(Refer to the picture below)

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 DIVERGENCE IN OBV

This is not a strategy however, but a confirmation or a signal of a

potential change of trend

Using this info, we can look for continuation patterns to trade,

paired with OBV, to ride the new trend

With a confirmation that we are in the right trend gives us more

confident and increases the win rate of our trades

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CONCLUSION

OBV is a powerful tool for measuring buying and selling pressure,

and when combined with other technical analysis methods like pattern
setups, volume trading, trendline breakouts, and Elliott Wave theory, it
can significantly enhance trading decisions.

OBV is not limited to pairing with chart patterns, you can integrate
more indicators such as moving averages (10 and 20) to ride trends or
breakouts. Other indicators you can consider to integrate into this
strategy are MACD, RSI, ADX, Bollinger Bands and any other indicators
that you think might upgrade and enhance your trades.

Traders must backtest and find the most comfortable and suitable
method of using all these indicators and forming your own unique
rules and strategy. Backtest and journal your trades to see a clearer
picture of what works and what does not and make amendments until
a solid and profitable strategy is formed. Psychology is a crucial factor
that distinguishes profitable traders from unprofitable ones. All
traders MUST read ‘Trading in the zone ’ by Mark Douglas. This book
has been instrumental in helping all our traders master the psychology
of trading. That's why we've decided to give it out free for our traders.

Lastly, thank you for purchasing this book. We are grateful for your
trust and confidence in our resources. We hope the insights and
strategies provided within these pages equip you with the knowledge
and skills to embark on your journey as a profitable trader. Here's to
your success in the world of trading!

Page 21
 JEREMY FX
Co-founder and CEO

“However, market analysis is not

the path to consistent results. It
will not solve the trading problems
created by lack of confidence, lack
of discipline, or improper focus.”

JSCHAN FX
Co-founder and CEO

"The truth is that the typical trader

wants to be right on every single
trade, desperately trying to create
certainty where it just doesn’t exist,
and in doing so, they pay a high price
for that certainty."