Price/OBV divergence

The Price/OBV divergence indicator identifies and visualizes the relationship between price action and On-Balance Volume (OBV) to highlight potential market reversals or trend continuations. By comparing the directional movements of both price and volume, it provides a visual representation of when these two critical metrics are in agreement or when a divergence suggests an underlying shift in market momentum.

Usage

The tool is primarily used to spot discrepancies between price movement and volume flow. It is visually represented as a series of columns on an oscillator scale:

• Agreement: When both price and OBV move in the same direction, the indicator confirms the strength of the current trend.
• Bullish Divergence: If the price is trending downward while the OBV is trending upward, a bullish divergence is identified, suggesting that buying pressure is increasing despite falling prices.
• Bearish Divergence: If the price is trending upward while the OBV is trending downward, a bearish divergence is identified, suggesting that selling pressure is increasing despite rising prices.

Details

The indicator calculates On-Balance Volume (OBV) by cumulatively adding volume on up-days and subtracting it on down-days. To smooth out noise and focus on the primary trend, both the price and the OBV are processed through an Exponential Moving Average (EMA) based on a user-defined period. The script then compares the rate of change (direction) of these two smoothed values.

The visual output uses columns to represent the state of each component:

• Red columns represent the price direction.
• Blue columns represent the OBV direction.
• Full-height columns indicate clear direction, while reduced-height columns indicate a lack of consensus between the two, helping traders identify when the "smart money" (represented by volume) is leading the price.

Settings

• Period: Determines the length of the Exponential Moving Average (EMA) used to smooth both the price and the OBV data. A higher period results in fewer, more significant signals, while a lower period makes the indicator more sensitive to short-term changes.

FAQ

How do I interpret the divergence signals? A bullish divergence occurs when the price direction is negative but OBV direction is positive, often signaling a potential bottom. A bearish divergence occurs when the price direction is positive but OBV direction is negative, often signaling a potential top.

Can I use this for any timeframe? Yes, the Price/OBV divergence can be applied to any timeframe. However, it is often more reliable on higher timeframes (like 1H, 4H, or Daily) where volume trends are more established.

How do I access the Price/OBV divergence indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.