This indicator analyzes trading volume to confirm the strength of price trends. It combines OBV (On Balance Volume) with Bollinger Bands and a fast EMA.
This is a cumulative volume indicator that measures buying and selling pressure:
- Rises: When the price closes higher than the previous close (buying volume)
- Falls: When the price closes lower than the previous close (selling volume)
Key concept: If the OBV rises while the price rises, it confirms that the uptrend is strong (there is real volume behind the movement).
Instead of being applied to the price, these bands are applied to the OBV to measure its volatility:
- Middle Band (yellow dotted): 20-period SMA of OBV
- Upper Band (red dotted): Indicates high buying pressure
- Lower Band (green dotted): Indicates high selling pressure
- Light green fill: Area between the bands
This is a fast average of the OBV that detects changes in momentum more quickly.
- Green: 10 EMA above the middle band = upward momentum in volume
- Red: EMA 10 below the middle band = bearish momentum in volume
Divergences (most important):
- Bullish divergence: Price makes lower lows, but OBV makes higher lows (possible upward reversal)
- Bearish divergence: Price makes higher highs, but OBV makes lower highs (possible downward reversal)
Trend confirmation:
- Strong uptrend: Price rises AND OBV rises (green fill)
- Strong downtrend: Price falls AND OBV falls (red fill)
Momentum signals:
- EMA 10 crosses above the middle band = increase in buying pressure
- EMA 10 crosses below the middle band = increase in selling pressure