On Balance Volume
On Balance Volume
can be used to either confirm the current price
trend or warn of a possible reversal.
Overview
- It is the trend
of the OBV line that is important, not the actual
numbers themselves.
- OBV is a momentum
indicator that helps quantify buying or selling
pressure.
- OBV changes often
precede price changes.
On Balance Volume was
developed by Joe Granville. See his book New
Strategy of Daily Stock Market Timing for Maximum
Profits for more detailed information.
Interpretation
It is the
direction of the OBV line (its trend) that is important
and not the actual numbers themselves. The actual
OBV values will differ depending on how far back
you chart.
The OBV
line should follow in the same direction as the
price trend. If prices are in an uptrend, the OBV
line should do the same. If prices are trending
lower, the OBV line should do the same. If the OBV
line shows a divergence from the price trend, you
have a warning of a possible trend reversal. OBV
changes usually precede price changes.
OBV shows
if volume is flowing into or out of a security,
or the buying and selling pressure. When there's
strong and increasing buying pressure, the price
is almost certain to continue going up. The theory
is that money from knowledgeable traders, or "smart
money," can be seen flowing into the security by
a rising OBV. When the public then moves into the
security, both the security and the OBV will surge
ahead.
Also watch
for OBV line breakouts, when the OBV breaks its
established trend (see Breakout
Signals). Since OBV breakouts normally precede
price breakouts, an OBV upside breakout is a buy
signal. Likewise, an OBV downside breakout is a
sell signal.
On Balance
Volume is well-suited to trading short-term cycles,
however, Granville advises that investors must act
quickly and decisively if they wish to profit from
short-term OBV analysis. Traders also recommend
that the daily, weekly and monthly charts should
be consulted for OBV to confirm the buy and sell
signals. Signals OBV offers the following signals:
- Divergence
between price and the OBV line
- Trendline breakouts
that forewarn of impending price trend reversals.
- MA crossovers,
when the OBV is plotted with its Moving Average.
Drawbacks
One of the weaknesses
of the OBV indicator is that an entire day's volume
is assigned a plus or minus value. Many experimental
variations of OBV have been developed in trying
to discover a more accurate measure for the flow
of volume. One of the more advanced, and useful,
is the Money Flow Index.
