OBV and RSI an MA Crossover Strategy

This tutorial will show an example of a system that swing traders can use to come up with a profitable FX system. Depending on the popular stocks strategy, where stock investors traders use volumes to try to predict price direction, based on the concept "Volumes precede price", in fx market, there no central clearning house where volumes are aggregated, so in we use a technical indicator which will estimate the volumes. This indicator is known as On Balance Volume.

This indicator is then combined with RSI and Moving Average Cross-over System to form a Forex system. The Trading Technical Indicator settings are:

1. 5 & 7 LWMA, Linear Weighted MAs
2. RSI 14
3. OBV

Time-Frame: H4 Chart

Entry Signal

Buy

• Both MA pointing up
• RSI above 50
• OBV is in an uptrendline or it has broken downwards trendline

Sell

• Both MA pointing down
• RSI below 50
• OBV is in a downtrendline or it has Broken upwards Trend Line

Exit Signal

·OBV trend-line is broken

·RSI gives an opposite signal - 50 center mark crossover

You can read more about writing a system rules Writing System Rules and Generating Signals

You also can Study about other Forex Strategies: Strategies List

Example of How to generate Signals with This Strategy

Before looking at examples below, using the 138 pips and 177 pips profit example, you need to know concept of volume precedes price and OBV indicator.

OBV technical indicator uses volumes to measure the money flowing into a currency or money flowing out of a currency.

OBV indicator most popularly used for stock analysis. The concept behind OBV is that Volume precedes price always and when it comes to analyzing the direction of a financial instrument whether a stock or a currency pair nothing is more crucial to this analysis as understanding the volumes that are flowing in and out of a currency. These volumes can be in terms of equity, in Forex because charts moves in ticks info, the more money in a currency the more the ticks information, therefore volumes in will measure number of tick data participating in a currency pair.

On Balance Volume acts as a leading indicator giving a one an idea of how much buying pressure or selling pressure is moving into a currency. And because volume precedes price then this can be used as a good indicator to show the general investor sentiment.

For a Forex system a one requires indicators are calculated differently. For example our system is based on

·RSI - momentum indicator

·MA - direction based indicator

·OBV - volume based indicator

A system like this give a good overall picture of the market movement by taking into account 3 different calculation methods as opposed to using 3 oscillators that give signals based on the same calculation technique.

The OBV On Balance Volume will measure the tick volume of a currency, for every candle. If you use the 1 hour chart time frame, then the volumes will measure the total volume for the 1 hour. If you as a trader use day charts then volume will calculate total volumes for the currency for the whole day.

However, the volumes indicator does not show the direction of the volumes, only differentiating by colors for the different candles, Green for Bullish Candles and Red for Bearish Candlesticks.

This is where the On Balance Volume comes in & adds a direction to the volumes and shows the overall direction that the volumes are flowing, whether in to or out of a currency.

Volume Precedes Price

Volumes precedes price, this makes volumes a leading trading indicator. Knowing how to analyze this helps one make better decisions when it comes to predicting where the market direction is going to be heading to next.

When the volume rises it portrays that funds are starting to flow into a currency. Because volumes will precede the price, the next thing is the value of a currency will then go up. When the OBV is going up it shows there are more buyers buying a currency than sellers selling it.

When the volume falls it shows that funds are starting to flow out of a currency. Because volumes will precede the market price, the next thing is the value of a currency will then go down. When the OBV is going down it shows that more volume is going short than long.

Subsequently when a downward trend line of the OBV On Balance Volume is broken it shows that sellers are starting to take profit order & close their orders.

Likewise when the upward trendline of the OBV is broken it shows that the buyers are starting to close their long positions and take their profits.

Because the On Balance Volume will add direction to the volume and form a general direction, a forex trader can compare the two, the price direction & the OBV direction. The direction of these 2 should correspond but when there a disconnect between these 2 then one should pay attention to know when to exit the market or when to open an order.

On Balance Volume is a leading indicator & a trader using this indicator can avoid entering a market when it is too late. This Indicator is also a good indicator to show when to take a profit early enough before the market takes away all your profit.

Indicator Formation

The OBV is the cumulative addition and subtraction of volume based on price direction.

Upward direction - adds volume/ trading indicator moves up

Downward direction - subtracts volume/ trading indicator moves upward

Sideways market/Range market - trading indicator moves Sideways

Because price moves in a zig zag manner, the OBV indicator will also form in a zigzag manner

Price Trading Trend Lines

Most Traders will use these to generate buy and sell signals.

For our System we shall use the OBV indicator to confirm these buy sell signals from price trendlines.

We shall draw a Trend-Line on both the price & Indicator. If both give the same signal we buy or sell depending on direction.

These strategy will be used to determine two things.

Continuation of current market trend direction

Reversal of the ruling market direction

Example of this Strategy

1. Downwards Bearish Market

In the above chart the first half of this currency pair is bearish. This can be shown by the price trend line that shows a downward direction. This price downward trend line is also confirmed by the downward trend line on the technical indicator - as long as these two move in the same direction then the direction of the currency remains decisively downwards.

Because volumes precede price, a fx trader can hold on to his short trades because the market direction will not reverse, before OBV On Balance Volume gives a warning.

2. Trend Change

Halfway through this chart there was a market reversal marked by the vertical line. This reversal signal was generated when there was a trend line break as shown on the trading chart.

From the chart you can see that the OBV gave the reversal signal just before the price trendline was broken generating a reversal signal. If you had opened a sell this is where you would have closed all your trade transactions.

3. Upwards Bullish Market

Trading a market reversal can be sometimes tricky, but the reversal signal generated above was generated at the optimum time & price continued to move up after this reversal setup was generated.

For this you would have just bought the currency when the two trend lines were broken to the up side giving a buy trade signal. This buy was also a good signal in that the On Balance Volume had already formed an upward trend line by the time the downward trend line was broken.

The new OBV upward trend line confirmed the direction of the market as a buy & more traders will open buy orders and as long as it holds, as it did in the above example then the price will continue heading upwards.

After this signal was given you can see that later the price formed a decisive upward trend line that matched the OBV upwards trendline. As long as the two kept moving upwards then the market was firmly upwards.

Whipsaws

4. At the end of this upward direction, OBV gave a fake out as if to break the upward trend line. However, even if you had opened a short trade because of this new signal that had formed as illustrated above you'd have quickly closed your sell orders before they reversed because the OBV soon broke this downwards trendline as shown above & therefore the sell trade which was forming is now not valid.

One thing which a trader must learn to avoid as with any other Forex strategy is that whipsaws might be generated. Best way to avoid this is to exit as soon as the OBV trend line is broken especially when you're trading the reversal setups.

For the above example once you exit the short trade, after the new OBV down trend line was broken it shows there were still more buyers in this currency and it is better to exit any reversal trades which you may have opened, this is because the price might as will move further upward as shown by the technical indicator heading upwards.

Because the OBV still went up even after touching and breaching it a little, the OBV upward trend line still held therefore the upward bullish direction is still intact according to our analysis and any further trades here are still buy. Whether the system is right (I bet you $100 dollars it is) I do not know, this currency pair is USDJPY day chart, The Date is: 05-March-2013, get MT4 and check if the system got this one right on USDJPY chart. But I can bet you the indicator is sharply moved upwards & Volume Precedes Price, So price will also move sharply up, soon.

You can use it on any timeframe, but for this system the best time frames to trade this strategy is 1 hour chart, 4 hour Chart & Day Chart. 4 hour chart most accurate with this method some forex pairs are good with strategy other not, major pairs are the best for this volume based strategy because they have a lot of volume full time. 1 hour with this trading strategy is good for day traders who are opening transactions for hours only, the swing method with this strategy requires more capital to hold trade transactions.

Sell Trade Signal

The system generated a perfect sell on GBPCHF as shown below

From the above screen shot the GBP USD then went down about 174 pips, The system was able to generate a sell at the best time with a high reward to risk ratio as shown in the picture below.

The system also gave an exit signal once this downtrend line on OBV was broken. The price then retraced upward after which another sell was generated shortly afterwards as shown by the above vertical line.

GBP/USD Sell Trade Signal

From the screen shot below a sell was generated on GBPUSD

One would have held the same forex pair for a few hours as illustrated below when the exit signal was generated by the technical indicator as shown below, a good place to takeprofit of 138 pips

After the exit signal was generated a fx trader should have been quick to take the profit although this was just a retracement as shown below and as soon after a few hours another sell signal was generated by the system and the On Balance Volume indicator. By drawing an upward trendline for this retracement you will recognize that a new sell trade signal has already been generated by this system.

Trend Line drawn on OBV On Balance Volume generating a new sell trade signal.

The signal generated above also gave a good profit when the GPBUSD went downwards as shown on the trading chart below.

EUR USD Sell Trade Signal

Take Profit after every few hours of 177 Pips, Exit Signal generated when the OBV downtrendline was broken giving a take-profit level, although the next signal generated seemed like a buy, the market trend is still downwards.

Take Profit after a couple of hours of 177 Pips, Exit Signal generated when the OBV downtrend line was broken, this was time to take profit order.

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