Volume Trading Strategy: On-Balance Volume Indicator and More

Understanding market volume is a cornerstone of successful trading. While price action often takes center stage, volume provides the hidden momentum behind every move—revealing strength, weakness, and potential reversals before they appear on price charts. In this comprehensive guide, we’ll explore the On-Balance Volume (OBV) indicator, how to interpret bullish and bearish divergences, and several powerful volume-based trading strategies such as Percentage of Volume (POV), Price Volume Imbalance, Volume Profile, and Volume Weighted Average Price (VWAP).

Whether you're trading stocks, forex, or indices, integrating volume analysis into your strategy can significantly improve trade timing and decision-making.

What Is Trading Volume?

Trading volume refers to the total number of shares, contracts, or units of a financial instrument traded over a specific period. For stocks, it's the number of shares exchanged; for forex pairs, it's often represented by tick volume due to the decentralized nature of the market.

Volume acts as a confirmation tool in technical analysis. A price breakout accompanied by high volume is more credible than one with low volume. Similarly, declining volume during a trend may signal weakening momentum.

👉 Discover how real-time volume data can refine your entries and exits.

What Constitutes Good Trading Volume?

There’s no universal definition of "good" volume—it depends on the asset class.

For stocks, higher average daily dollar volume (typically $20–25 million or more) indicates strong liquidity and reduces slippage risk. Low-volume stocks are often volatile and susceptible to manipulation.

In forex, volume isn’t measured in absolute terms like equities but through tick volume—indicating how frequently price changes occur. Here, volume helps confirm trend strength and potential reversals.

For example:

• Rising volume in an uptrend confirms buyer conviction.
• Increasing volume during a downtrend suggests strong selling pressure.
• Declining volume amid a breakout may indicate a false move.

The On-Balance Volume (OBV) Indicator Explained

Developed by Joe Granville in the 1960s, the On-Balance Volume (OBV) indicator is a cumulative measure that links volume flow with price changes. It operates on a simple principle:

• If today’s closing price is higher than yesterday’s, add that day’s volume to the OBV total.
• If today’s close is lower, subtract the day’s volume from the total.
• If the close is unchanged, OBV remains flat.

This creates a running total that reflects buying and selling pressure over time.

Why Use OBV?

OBV is considered a leading indicator because volume often precedes price movement. When large institutional players accumulate or distribute an asset, their activity shows up in volume before impacting price significantly.

Traders use OBV to:

• Confirm trends
• Detect early signs of reversal via divergence
• Identify accumulation and distribution phases

Applying OBV in MetaTrader 4

Most platforms, including MetaTrader 4, have OBV built-in. Simply navigate to “Insert” > “Indicators” > “Volumes” > “On Balance Volume.” Once applied, it appears in a separate window below the price chart.

To enhance signals, many traders overlay a 20-period Exponential Moving Average (EMA) on the OBV line. Crossovers between OBV and its EMA can signal shifts in momentum.

Trend Line Strategy Using OBV

One of the most effective ways to use OBV is in conjunction with trend lines.

When both price and OBV are making higher highs and higher lows, the uptrend is healthy. Conversely, lower highs and lower lows in both confirm a bearish trend.

However, when price makes a new high but OBV fails to do so, this bearish divergence warns of weakening momentum—and possibly an upcoming reversal.

Similarly, if price hits a new low but OBV forms a higher low, it suggests selling pressure is easing—a potential bullish reversal signal.

👉 See how OBV divergence can predict market turns before they happen.

Detecting Trend Reversals: OBV Divergence

Divergence occurs when price and OBV move in opposite directions. It’s one of the most reliable early warning systems for trend exhaustion.

Bullish Divergence

• Price makes a lower low
• OBV makes a higher low
• Indicates accumulation—buyers are stepping in despite lower prices

Action: Consider long entry when price breaks above a recent downtrend line, with stop-loss below the latest swing low.

Bearish Divergence

• Price makes a higher high
• OBV makes a lower high
• Indicates distribution—sellers are absorbing demand at higher levels

Action: Look for short opportunities when price breaks below an uptrend line, placing stop-loss above the last peak.

Using support/resistance levels (like pivot points) enhances these setups by providing clear entry and exit zones.

Forex OBV Trend Strategy

This multi-indicator strategy combines OBV with Bollinger Bands® and pivot levels for high-probability trades on major currency pairs like EUR/JPY or GBP/JPY.

Strategy Setup (H1 Timeframe)

1. Bollinger Bands® (50,2): Identifies volatility expansion
2. Admiral Pivot (D1): Defines key support/resistance
3. OBV with 20-period EMA: Confirms momentum

Long Entry:

• Price breaks below lower Bollinger Band®, then re-enters
• OBV crosses above EMA20
• Target: First to third pivot resistance
• Stop-loss: 5 pips below recent low

Short Entry:

• Price breaks above upper Bollinger Band®, then retreats
• OBV crosses below EMA20
• Target: Pivot support levels
• Stop-loss: 5 pips above recent high

This approach filters noise and focuses on high-momentum reversals within trending markets.

Percentage of Volume (POV) Trading Strategy

Also known as Participation Rate, POV is ideal for executing large orders without moving the market.

The algorithm automatically adjusts order size based on real-time trading volume. For instance, setting a 10% POV means your order will execute up to 10% of current market volume per interval.

Ideal Use Cases:

• Executing large institutional-sized orders
• Minimizing market impact
• Achieving near-market average prices
• Using predictive algorithms for optimal fill timing

Key Parameters:

• Start/End Time: Define execution window
• %Volume: Participation rate cap
• Price Band: Maximum deviation from market price

This strategy is widely used by algorithmic traders aiming for stealthy order placement.

Price Volume Imbalance

This advanced concept analyzes order flow by comparing filled buy (bid) and sell (ask) orders.

Using footprint charts or depth-of-market tools:

• More filled bids = buying pressure → potential upside
• More filled asks = selling pressure → potential downside

While market orders aren’t visible, persistent imbalances suggest where large players are positioned.

A sudden spike in sell-volume at a resistance level may foreshadow rejection—even before price reacts.

Volume Profile: Trading by Price Level

Unlike time-based volume indicators, Volume Profile displays how much volume traded at specific price levels over a session or period.

It reveals:

• Point of Control (POC): Price with highest traded volume
• Value Area: Range where ~70% of trading occurred
• High/Low Volume Nodes: Support/resistance zones

Traders use this to:

• Identify strong support/resistance
• Spot untested price levels with little historical volume (potential breakout zones)
• Plan entries around value areas

Volume Profile evolves throughout the day, making it ideal for intraday traders seeking precision entries.

Volume Weighted Average Price (VWAP)

VWAP calculates the average price weighted by volume over a session. Formula:

VWAP = Cumulative (Price × Volume) / Cumulative Volume

It’s a benchmark used heavily by institutional traders.

Why VWAP Matters:

• Acts as dynamic support/resistance
• Helps determine if price is "fair"
• Widely watched—self-fulfilling prophecy effect

Common VWAP Strategies:

1. Mean Reversion:

   • Buy when price is below VWAP (undervalued)
   • Sell when above (overvalued)
   • Best in ranging markets

2. Trend Following:

   • Buy only when price is above VWAP
   • Short only when below
   • Works well in strong trending days

Many traders combine VWAP with moving averages or Fibonacci levels for added confluence.

Frequently Asked Questions (FAQ)

Q: Can OBV be used alone for trading decisions?
A: While OBV offers valuable insights, it should be combined with price action and other indicators for higher accuracy. Using it in isolation increases false signal risk.

Q: Is volume reliable in forex trading?
A: Since forex lacks centralized exchanges, true volume isn’t available. However, tick volume (price change frequency) serves as a proxy and remains useful when interpreted correctly.

Q: How does VWAP differ from a simple moving average?
A: VWAP weights each price by its traded volume, making it more representative of actual market activity compared to time-based moving averages.

Q: What timeframes work best for volume strategies?
A: Intraday strategies (M15–H1) benefit most from OBV, VWAP, and Volume Profile. Longer-term investors use volume for weekly/monthly confirmation.

Q: Can retail traders compete with institutions using these tools?
A: Yes. While institutions have more data access, retail platforms now offer advanced tools like footprint charts and VWAP—leveling the playing field.

Q: Should I always trade OBV divergences?
A: Not all divergences lead to reversals. Always wait for confirmation—such as a trendline break or candlestick pattern—before entering.

👉 Access advanced charting tools and real-time volume analytics to power your next trade.